One of the more common questions we get on the topic of financing your barndominium is whether the barndominium VA loan exists?
Long considered one of the top mortgage products, the VA loan is for eligible veterans and 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 is guaranteeing the loans, they have more strict requirements than a traditional lender. Although Barndominium VA loans are possible, but we actually do not recommend using them 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’ll explain the reasons why.
Barndominium VA Loan – The Basics
Below is an excerpt from Facebook user Jason Casbeer, explaining why it’s better to use the VA Loan Program for refinancing rather than a new construction loan.
VA New Construction Loan
The VA doesnt actually provide loans, the VA provides guarantees (or at least %’s of guarantees) for OTHER people who do provide loans. This lowers the risk for the loan provider, and thus down payments aren’t necessary, mortgage insurance isn’t necessary, etc.
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, items that are related to loan qualification fall into this category. The VA nor the country wants Veterans being approved for loans they cannot afford, and news articles of Veterans losing their homes because the VA didn’t adequately screen loan originators or provide sufficient guidance on approvals for qualifications. So part of what they want 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, there is another level of demand and it relates to the protection of the construction loan, so 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 a 12 month deadline to get it completed, all constuction fees are on the builder, and there must be a 10 year warranty on new construction home, etc.
These demands protect the Veteran and the VA’s guarantee program on the interim note.. these demands are also WELL BEYOND anything any regular bank would ever require from a “builder”.
So 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 dont 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 its work for a builder to do that on your behalf. Now if you live close to major population centers, you may not have a problem finding a builder to go through this, but if you dont, then its a task to work out.
From everything I read, and everything I know… its not really an avenue that is preferred. There is no shortcut through qualification through this channel or your normal conventional funding sources (like the bank) for new construction… so if you cant get approved by the bank, you wouldnt get approved by the VA.. so why incur the greater expense?
Heres a quick shot of some articles:
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 increase costs of using the loan on the backside. What I’m saying is, 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 its 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 its done. In return, they get approval on your budget, they look at your builder (hopefully they know them), they require all the same builders risk insurance, they control the draws, they check to make sure the draws line up with construction progress, etc..
So all it really comes down too is whether you’d be approved for a mortgage on the $100,000.00. Like I said before, 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. So.. I really don’t know why anyone would want to try to use the VA Construction loan program. Its better to find a solution and go the traditional route for the construction, then refinance your interim loan using your barndominium VA Home Loan.
Using the VA Home Loan benefit means that you’re “going to the VA” at the point in this process in which a real house and land already exist (which is what they really want), it can be appraised, it can be seen and touched and everything.
Now they may still want warranties, and they will still need to appraise the loan, but heres the thing… most banks that finance the interim loan ARE ONLY doing it if you’re approved for the mortgage… and since that down payment is already made, most times they will roll it with a single close (the close you made on the construction loan).
What this means is… there may not be a good reason to even use your VA Home loan at this stage… it depends on credit worthiness 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 not hard. Banks are becoming way more welcoming to barndominuim appraisals by the day.