Building barndominiums can be full of issues that might seem challenging to overcome. The main problem can be finding a lender willing to finance the project. Lenders’ loan requirements are often strict and require a good credit score and a large downpayment.
However, the United States Department of Agriculture (USDA) might have a solution.
The USDA guarantees loans for buying, building, and renovating homes, including barndominiums within qualifying parts of the country, with very attractive interest rates and downpayments. Therefore, a USDA loan may let you build a dream barndominium where conventional home loans and mortgages may be out of your reach.
The federal government doesn’t issue the USDA home loan. Instead, it’s backed by them and issued by approved lenders nationwide. Typically, the program increases homeownership among low and middle-income families in specific regions.
The program offers construction loans and mortgages for building or buying a home within rural areas instead of overpopulated urban districts.
Generally, the loans require little or no downpayment. Hence, it’s very accessible for those families unable to save for a downpayment on a conventional mortgage. And they come with very competitive interest rates.
Currently (August 2023), the rate for low-income families is 2.5%. In comparison, middle-income families’ rates are slightly higher.
Most people apply for a construction-to-permanent loan. This loan allows you to build a barndominium. It’ll cover all expenses associated with the property, from buying the land to finishing the inside of the barndo shell.
After project completion, the loan automatically converts to a mortgage, paid off over a standard mortgage term. These loans have fixed interest rates. However, you can refinance through USDA after the construction phase.
If all this sounds ideal for your purposes, stick around, and we’ll tell you everything you need to know about USDA home loans.
Types of USDA Loans
The USDA offers to guarantee several home loans. To help you decide which loan suits your circumstances, it’s essential to understand them.
Remember, it’s necessary to have plans and paperwork ready for whichever loan you choose before searching for a lender.
USDA Home Improvement Loans
This loan targets people who want to improve their homes. You can use the finance to make improvements and conversions on an existing property.
Therefore, converting it into a barndominium may be possible if you own a derelict barn.
Guaranteed USDA Loans
You apply for this loan through an approved lender listed on the USDA website. Once you’ve submitted your application, the bank issues the loan subject to USDA eligibility criteria.
With a guaranteed USDA loan, you don’t usually need a downpayment. And you don’t need mortgage insurance. Instead, you pay an upfront and monthly fee.
Direct USDA Loans
Rather than a bank, the USDA itself issues a direct USDA loan. However, these are much more difficult to get if you have a construction loan.
Generally, you won’t qualify if you want to build a barndominium. But, improving or converting an existing building is usually acceptable.
Typically, very low-income families have these loans. The criteria are that your income must be below the low-income threshold for the area you are moving to. Usually, this income is below $17,000/year.
Benefits of USDA Loans for Barndominiums
Applying for and being granted a USDA loan gives the borrower several benefits. Especially if you have a low to middle income.
The main benefits are:
- Lenient eligibility requirements
- Little or no downpayment
- The construction-to-permanent mortgage is a single loan, so you only have one set of closing fees.
- You don’t only have to self-build. You can also buy traditional single-family homes or existing barndominium structures.
No down payment requirement
A USDA loan offers 100% financing. Therefore, you don’t need a downpayment. Furthermore, suppose you’ve qualified for a loan. In that case, you don’t start paying interest on the money until after you’ve built the barndominium and moved in.
Compare this with a traditional financing option, which needs at least 20%. So, for an average barndominium costing from $74,000 to $330,000, the downpayment will be between $14,800 and $66,000. This amount isn’t easy to raise if you don’t earn much money.
You can now see what a benefit the USDA program is.
Low interest rates
One of the best things about a USDA loan is the affordable low interest rate. At the close of 2022, a USDA loan had an interest rate of 3.25% for a low-income family.
However, remember that this figure is an ideal scenario. Your personal interest rate depends on the lender, your credit score and history, and the current mortgage market.
If you want to check USDA loan rates, use this interest rate calculator. They are some of the lowest available for the ordinary person.
However, getting a USDA loan doesn’t mean accepting a cut-price mortgage or below-market rates. All loans and mortgages are personal to the borrower and depend on several factors.
For example, you must have a good credit score and a low income-to-debt ratio to get the cheapest monthly payments. And although the USDA doesn’t need a downpayment, it will help if you can supply one.
Finally, shop around among a few USDA-approved lenders and see what rates they set for your circumstances.
No mortgage insurance required
For a typical conventional home loan, you must provide Private Mortgage Insurance, especially if you haven’t a large downpayment.
However, the USDA loan doesn’t require this insurance. Instead, the loan has two fees:
- An upfront payment on closing the loan, which is typically 1% of the total loan amount.
- An annual fee is usually paid in monthly installments and added to the loan repayment. Payments are equal to 0.35% of the remaining principal balance.
Compare these figures with FHA and conventional mortgage insurance:
- A traditional loan Private Mortgage Insurance has premiums based on your credit score, debt-to-income ratio, and other factors, typically significantly above 1%.
- An FHA Mortgage Insurance Premium stipulates 1.75% upfront Mortgage Insurance Premium and 0.55% annually.
As you can see, USDA loans require a fraction of the mortgage insurance premiums you usually pay.
Flexible credit score requirements
Generally, a borrower’s credit score is the most significant issue when applying for a home loan.
Most lenders require a score of more than 620 for a conventional home loan. However, if you want to benefit from low-interest rates, you should score 740.
Fortunately, USDA doesn’t have a minimum credit score requirement. However, if you want to use the USDA’s automated underwriting system, have a score of over 640.
But, don’t worry if your score is lower than this. You can still qualify with extenuating circumstances using the manual underwriting system. However, this does lengthen the loan processing duration.
Funding for both land and construction costs
To build a barndominium, choose a USDA construction loan, which can be either:
- Interim financing loan with a traditional 30-year fixed USDA loan
- Single-close loan combining a construction loan with a home loan
The single-close loan is usually the better option as there’s only one closing, reducing the total costs. Fortunately, this type has lenient requirements and is accessible to almost anyone.
Therefore, there’s a better chance of securing this type of loan than a conventional one.
The most important thing to realize is that the USDA home loan eligibility depends on your location. Barndominiums, and indeed any house, must be in an approved area.
The idea behind the USDA home loans encourages people to migrate to rural areas, away from suburbs and cities.
Fortunately, the USDA has a map you can inspect, showing the approved rural areas. Choosing a site from the map will help you be one step closer to realizing your dreams.
However, remember that rural doesn’t necessarily mean living in the middle of nowhere, miles from the nearest shops or schools, with only a tumbleweed for company. Sometimes, you’ll be in a sparsely populated suburb or just outside the city center.
Loan Eligibility Requirements
Typically, the eligibility requirements for securing a USDA loan are relatively lenient compared to a regular mortgage. Not only can you get 100% financing, but the loan also requires a lower income.
However, remember that you still need a steady job and a stable source of income, as you need proof of at least two years of regular employment.
To qualify for a USDA loan, your household can’t earn more than 115% of your state’s median income.
If you aren’t sure what this means, “Median Family Income” is the greater of:
- 115% of the average state non-metropolitan median family gross income
- 115% of the US median family gross income
- The USDA housing initiative’s area gross income limit multiplied by 1.4375
Note that each limit specifies the “family’s income.” This is important as it includes everyone in the household, not just the primary earner.
However, there are specific expenses that you can exclude, such as childcare for under 12s and disability expenses exceeding 3% of your income and student income, depending on the student’s age.
The USDA publishes an income calculator which helps you determine if you qualify. Furthermore, there’s also a list of income limits for individual counties, so you can fine-tune where you intend to live.
Remember, it’s the total household income that we’re talking about. If you aren’t sure which category of income you belong to, the USDA defines very-low, low, and moderate incomes in this document on its website.
Debt-to-income ratio limits
After considering your monthly debt commitments, the lender needs to know your debt-to-income ratio to see how much money remains from your total income.
After calculation, your housing expenses must not exceed 29%, and the total debt-to-income ratio must not exceed 41% of your monthly income.
This eligibility criterium might sound obvious. But you’d be surprised how many people don’t realize its importance.
To receive a USDA loan, you must be entitled to live in the US or certain other territories.
To be eligible, you must be a US Citizen, a US Non-citizen National, or a Qualified Alien. The definition of the first category is self-explanatory.
But for your information, the others are defined as:
- A US Non-citizen National is born in an American territorial possession after the US acquired it. This could be somewhere like American Samoa or Swain’s Island. Furthermore, they’re eligible if the applicant’s parents are US Non-citizen Nationals. Look on this federal government webpage if you need further clarification.
- A US Qualified Alien is a non-citizen with permanent legal residence. People like this are sometimes called “Green Card Holders.” If you aren’t sure whether you fall into this category, you can find the entire list on the United States Department of Health and Human Services webpage.
Your credit score must fall within the lender’s requirements to qualify for a USDA home loan. Typically, this must be more than 640.
However, getting approval for a loan with a score of 600 is possible. For scores below 640, you need manual approval by the underwriter.
To achieve this approval, you must have one or more compensating factors, such as:
- Long employment history.
- A savings account large enough to cover several mortgage payments.
- A low debt-to-income ratio.
You can only secure a USDA home loan for new and existing properties in specific low-income, rural communities. The USDA publishes an interactive eligibility map for you to search potential addresses.
Typically, the eligible addresses will be in rural towns and cities with a population of less than 35,000. However, if the area is classed as low-income, then settlements with a population of more than this are eligible.
We usually find barndominiums in rural areas, so building in these areas shouldn’t be an issue. However, you can’t purchase land with a loan and then build at a later time. Instead, you must start your project immediately after approval.
You can also use a USDA loan to repay a new loan secured using conventional means.
Suppose you don’t want to wait for USDA approval but buy the land and barndominium using a traditional loan. In that case, you can pay it off using the USDA loan when approved.
Remember that an eligible rural area may not be miles from anywhere, with only coyotes and tumbleweeds for company. There might be USDA-approved areas within suburbs or on the outskirts of a city center.
Property usage requirements
You probably won’t be surprised to find out that there are restrictions on the usage of properties purchased using a USDA loan.
The limits require the property to be a primary residence and not used for commercial purposes. Therefore, it can’t be a vacation home or rented out.
Apart from the usage requirements, the property must be eligible for a USDA loan.
- It must be within a designated USDA area.
- On completion, it will be your primary residence.
- The property cannot be income-generating. However, you can purchase one that was previously a commercial property.
- An access road must be an all-season concrete or asphalt road.
- The property must be durable and in a reasonable structural condition with a suitable roof.
- The barndominium must have safe and fully operational HVAC, plumbing, drainage, and electrical systems.
- You must hire a USDA-approved contractor to do the work or supervise any DIY.
Some of these requirements might be problematic if you buy a derelict fixer-upper.
In this case, it may be possible to use a conventional loan, do the essential work necessary to pass the property eligibility requirements, and then use a USDA loan to refinance.
USDA Loan Application Process for Barndominiums
Buying an existing barndominium is more manageable than building one or assembling a kit. However, to get a USDA loan, the assessor must usually have at least three barndominiums in the area to determine a value.
The following sections outline the loan application process.
Financing a non-construction barndominium
The following list describes the process for purchasing an existing (non-construction) barndominium.
- Find a barndominium in a USDA-approved area with enough comparable, nearby properties to determine its value.
- Ensure your family’s gross income falls within the USDA income limits.
- Ensure you have funds for the closing costs.
- Approach a USDA-approved lender and apply for a loan.
- Submit documents proving your work history, income-to-debt ratio, and credit score. These are usually W2s, bank statements, and pay stubs. The lender also needs a copy of your credit report.
- Get a pre-approval letter from the lender for at least the amount necessary to purchase the barndominium.
- Ensure the lender can approve a USDA loan for the property.
- Make an offer to the seller’s realtor for the property.
- When the seller has accepted an offer, have the lender order an appraisal.
- If necessary, submit any missing documents required by the lender’s underwriter.
- Complete the loan approval, and sign the final paperwork.
- Get the barndominium’s keys and move in.
Although these steps seem straightforward, buying and selling a property is always stressful. There are often issues that arise to drag out the process.
But, if you keep your head afloat and take advice from a qualified attorney, you can very soon be the proud owner of a barndominium.
Building a barndominium with a USDA construction loan
Alternatively, you can use a USDA construction loan to build a barndominium. No-downpayment construction loans are almost impossible to find from conventional lenders. However, the USDA fills this niche.
Furthermore, the USDA construction-to-permanent loan allows you to buy the land, build your home and finance it with a 30-year fixed-rate mortgage when you move in. And, there’s only one set of closing fees, so you save money there too.
What Do USDA Construction Loans Cover?
The USA construction loan covers everything associated with a home build, including purchasing the land, and you won’t need to come up with a downpayment.
Furthermore, you can use the loan for a single conventional home or a manufactured home such as a barndominium.
The construction loan covers the following:
- Buying the land
- Inspection fees
- Architect’s plans
- Builder’s insurance
- Administration fees associated with the construction phase
- Building permits
- Installing utilities or installing a septic drainage system
Finding a USDA-approved lender
Unfortunately, not every lender offers USDA-backed loans. Therefore, the bank you’ve used all your life may not provide this service, forcing you elsewhere.
Eventually, you may find a lender offering the deal you want, but this might not be in a convenient area. Fortunately, the USDA publishes a list of USDA-approved lenders for you to use.
Gathering necessary documents
To qualify for any mortgage or home loan, you need supporting documentation; USDA loans are no exception.
We’ve mentioned these before but should consider them in more detail.
The property’s value
Lensders must be satisfied that they can sell your home and retrieve their money if the borrower defaults on the payments. Therefore, the lender must verify the property’s value.
Suppose you have a relatively rare home like a barndominium and no others in your area. In that case, the lender will think twice about financing your project.
However, according to the USDA manual, if the USDA appraiser can find at least three similar properties in the area that sold within the last 12 months, they have discovered comparable sales, and all is well.
And even if there aren’t any similar sales, the appraiser can determine the barndominium’s value based on the build costs. However, lenders don’t like this method, and few appraisers would use it.
Compile all financial documents to prove earnings and regular employment. These include W2s, bank statements, and pay stubs for at least two years.
Don’t forget you need these from everyone in the house, as the USDA considers the household’s gross income.
We’ve already covered this elsewhere, but you need verification that the area is USDA-eligible. Use the eligibility map as proof.
Your income must be within the local income limits specified by the USDA.
Use a USDA-approved lender. Once again, find an appropriate lender on the USDA website.
In addition to the property’s value, the appraiser determines whether the property meets the USDA safety requirements.
You must use a USDA-approved contractor to do the work, or if you want to do some of the work yourself, they must be on-site to supervise your work.
Verify that the contractor is USDA-approved, has the necessary insurance, and is authorized to work in the state.
Completing the application
When you’ve compiled all necessary documentation, apply and wait.
Be prepared to submit further documents if the underwriter needs them.
Waiting for approval
Waiting for approval is difficult, but it’s ultimately worth it. Remember that a USDA loan can take longer than conventional financing.
Generally, the USDA reviews the documentation first to confirm your eligibility before loan approval by the lender. This can take up to three weeks extra to complete.
Depending on your circumstances, the application can take 30-60 days, with an average of around 45 days.
Closing the loan
Compared to traditional loans, where the construction loan and long-term financing are separate, requiring two different closing fees.
The USDA construction-to-permanent loan is one agreement and only needs one closing. Therefore, you can buy the land, build the barndominium and finance it over a standard mortgage term using a single loan.
Tips for a Successful USDA Loan Application
Qualifying for a USDA loan is impossible if you don’t comply with the eligibility requirements.
Generally, the main issues related to this loan are usually associated with the eligibility requirements:
- There is a limited selection of lenders.
- You can only use the financing in approved areas.
- Your family’s income is outside the USDA limit for the area.
- The property itself isn’t eligible.
Check the designated state’s USDA loan requirements to ensure everything goes smoothly and you don’t waste your time and effort.
Know your credit score and work to improve it
Repay as many of your debts as possible, especially those with large repayments. Thereby increasing your residual income and giving you more chance of approval.
Inspect your credit report for mistakes and out-of-date information. Then, compile documentation to support your version of the credit report.
Although difficult, you can increase your family’s income by getting an extra part-time job, moving to a different area, getting a raise, or finding a better-paid job.
Decrease your outgoings by cutting back on luxuries. This increases your bank balance and shows you can control your spending.
Choose a USDA-approved lender, experienced in barndominium financing
Financing a barndominium differs from conventional lending. Barndominiums are still rare, and few lenders know their advantages.
Therefore, choose a lender with experience in agricultural buildings, modular buildings, or barndominiums. These will usually be in rural areas.
The USDA has a list of approved lenders categorized by state, so use this resource to make your life easier.
Gather all necessary documentation before starting the application process
Compile all the documentation that supports your application into a professional-looking format.
Making it easy for the underwriter to read will go a long way to smoothing the path for a successful application.
Be prepared for a longer application process than traditional mortgages
The documents you send to the lender supporting your application must go to the government department for approval before the lender’s underwriter can do their part.
This often takes from two to three weeks extra.
What are the income limits for USDA loans for barndominiums?
The income limit for USDA home loans varies depending on the area where you want to live. Eligibility requires your family’s gross income to be no more than 15% above the area’s median income.
For example, suppose your area’s median salary is $66,500. In that case, you can qualify for a USDA loan if your salary is less than $76,475. Look on the USDA’s website for information on your area’s income limit.
What is the maximum loan amount for USDA loans for barndominiums?
USDA doesn’t set a maximum loan amount for their loans. Instead, your gross household income and the debt-to-income ratio caps the amount you can borrow.
Furthermore, your eligibility for a USDA loan depends on the median income where you live. So, we can say that the maximum loan amount depends on your location and that area’s median income.
Can I use a USDA loan to purchase an existing barndominium?
Yes, the USDA loan offers to help low-income families buy, build or renovate homes in designated rural areas.
So, as long as the property satisfies the USDA eligibility and the appraiser’s report is favorable, you can buy an existing barndominium.
How long does it take to get approved for a USDA loan for a barndominium?
After you submit your application, the lender sends the file to the Department of Agriculture to confirm that it complies with their criteria. Afterward, it returns to the lender for underwriting.
This process can add two to three weeks to the usual processing time. However, it rarely takes longer than 60 days and is more like 45 days.
Can I use the USDA loan program for home repairs, improvements, accessibility, and energy-efficiency upgrades?
You can use the USDA loan for many purposes, including repairing and improving an existing home. Some improvements include upgrading utilities, insulation, replacing doors and windows, installing solar panels, and improving the surroundings.
Furthermore, suppose you have a disabled family member. In that case, you can install equipment or make alterations to help with their day-to-day life.
Can I use a USDA loan for a vacation home?
USDA loans have occupancy criteria that owners must adhere to.
The most important requirement is that the home must be a primary residence. Therefore, it can’t be a vacation home or a commercial premises. Furthermore, you must comply with the following:
- Move into the property within 60 days of closing the loan.
- Only live with your immediate family.
- Confirm the property is in a USDA-designated area.
- Ensure the home complies with the minimum USDA property standards.
A USDA zero downpayment home loan encourages low-income families to own their homes in designated rural areas. In addition to not having a downpayment, the loan also has lower interest rates than a conventional mortgage.
Furthermore, choose the construction-to-permanent loan product. You can then use one loan to purchase the land and build your house before it becomes a typical fixed-rate mortgage.
Even better, you save money by closing once rather than twice for two loans. However, you must meet all the criteria laid down by the USDA, which include using a USDA-approved lender, having a minimum credit score, an income cap depending on where you live, proof of a regular income, and restrictions on where to buy or build.
Now you know what a USDA home loan is and how to get one. What’s to stop you from going down this route? As long as you comply with its requirements, the USDA is one of the best ways to purchase or build a barndominium.
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