When trying to find solutions for financing your barndominium it is important to look at all your options. There are a number of different options available to you including FHA loans and traditional construction loans. However, if you are a veteran of the Armed Forces, a VA loan is one of your best choices. Knowing everything you can about a barndominium VA loan can help you choose wisely.
Long considered one of the top mortgage products, the VA loan is for eligible veterans and is available through many regional and national banks. The loans are guaranteed by the Department of Veterans Affairs and the rates available are typically much lower than traditional products.
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Because the Department of Veterans Affairs guarantees the loans, they have more strict requirements than a traditional lender. Although barndominium VA loans are possible, they may not be the best option for the initial construction loan. Because of these strict rules, you’re better suited getting a traditional construction loan then refinancing using a VA loan.
In this article, we have put together everything you need to know about getting a barndominium VA loan.
Barndominium VA Loan – The Basics
VA New Construction Loan
When you get a barndominium VA loan, the VA doesn’t actually provide loans. Instead, the VA provides guarantees for other institutions that do provide the loans. This lowers the risk for the loan provider, and thus down payments aren’t necessary, mortgage insurance isn’t necessary, and a lot of other benefits present themselves.
For the VA, there are certain “items demanded” in return for their guarantee.
Some of these demands are for the Veteran, items that limit “fees” are a good example, the downpayment aside, origination fees are capped, and other fees are capped or restricted.
Some of these demands are to help protect the VA loan guarantee program, and items that are related to loan qualification fall into this category. Part of what the VA wants is to ensure that this great benefit continues to be made available for those that have earned it and the best way to do that is to protect it from abuse.
For new construction loans for a barndominium, there is another level of demand and it relates to the protection of the construction loan. With items like requiring builders to provide 2 years of P & L’s, proof of credit worthiness, proof of liability insurance, there are no payments on the construction loan until it is completed. There is also a 12-month deadline to get it completed, all construction fees are on the builder, and there must be a 10-year warranty on new construction home.
These demands protect the Veteran and the VA’s guarantee program. These demands are also well beyond anything any regular bank would ever require from a builder.
Though it does help, and it can be a great tool, it also drives up the final cost for the Veteran, and severely restricts the options for choosing a builder, which is important when you don’t live within 30 miles of a major city.
You as the Veteran not only have to qualify for such a loan, but your builder has to qualify as well and be willing to go along with the program, and it works for a builder to do that on your behalf. If you live close to major population centers, you may not have a problem finding a builder to go through this, but if you don’t, then it’s a task to work out.
Why Would You Want to Use a Barndominium VA Loan for New Construction?
The benefit of having almost no down payment is almost lost on the increased costs of using the loan on the backside. Down payments for new construction aren’t typically black and white in relation to physical cash. Down payments for new construction are normally viewed within the context of budget vs future appraisal.
So as an example: Your builder says he needs $100,000 for the land and to build your house. He has plans and everything. The bank looks at those plans and does an appraisal on them and they then appraise that the land and the home would be worth $125,000 once it’s completed.
So you need to borrow $100,000 to get the land and build the house, and the person that you want to borrow from is putting the value of what you want to build on that land at $125,000.
The person you’re wanting to borrow from requires 20% down to approve the loan.
So they use their $125,000 appraisal or valuation, minus the $100,000 that you need to borrow, and that leaves $25,000. It just so happens that $25,000 is 25% of $100,000. THAT is your down payment.
That “down payment” represents the equity of the finished product. You giving it to them at the front is the same as them having it once it’s done. In return, they get approval on your budget, they look at your builder, they require all the same builders’ risk insurance, they control the draws, and they check to make sure the draws line up with the construction progress.
All it really comes down to is whether you’d be approved for a mortgage on the $100,000.00. Qualifications through a bank or any other lender are the same and going this route still doesn’t require any significant cash for a down payment.
Getting a barndominium VA loan means that you’re going to the VA at the point in this process in which a real house and land already exist and can be appraised.
They may still want warranties and they will still need to appraise the loan, but most banks that finance the interim loan are only doing it if you’re approved for the mortgage. Since that down payment is already made, most times they will roll it with a single close.
What this means is there may not be a good reason to even use your VA Home loan at this stage. It depends on creditworthiness and some possible rate advantages, but it may just mean that a conventional loan would work just fine.
The best course of action is to find a good deal on some land, get with a good builder and look to get value from the builder through terms that mitigate exorbitant over-charging, meaning a budget that gets what you want and will appraise for more than the budget. Then, find a lender that offers terms that will work in relation to any required down payment vs appraised value so that you can minimize any cash requirement to close that gap. This is an absolutely doable plan since banks are becoming way more welcoming to barndominium appraisals by the day.
If you would like more guides like this one, check out the rest of BarndominiumLife.com. There, you will find more helpful tips and tricks from the pros. You will also find featured barndominiums, barndominium floor plans, and information on financing and insurance. Knowing as much as you can will help you get the best results for your dream home.