Editor’s Note: Looking to find a barndominium loan?
Financing a barndominium can be a challenge, but being prepared will help you find a lender for your project.
Farm credit lenders and local banks are your best bets for getting a new construction loan on a barndominium. Having the following items can help the process along as well:
- Solid plans
- Actual contractor or subcontractor bids and
- A good credit rating
- In the rest of this post, we’ll discuss what you need before your initial visit with a lender when building a barndominium.
By knowing what to expect when financing a barndominium, you can get the loan you need for your dream home.
What You Need Before Financing a Barndominium
The most important thing is to avoid going in to see a lender with your plans just drawn on a sheet of paper. If nothing else, invest in some good home design software, which is a program that will render detailed 3D drawings and itemized building supply lists. However, your best bet will almost always be to work with a professional draftsman.
In any event, whether you design the plans by yourself or do so with the help of professionals, bring them, along with a detailed materials list and a credible building timeline, to your initial meeting with a lender.
Details Are Your Best Friend
The more detail you have, the better your chances. You’ll need items like:
- Blueprints with schematics and a floor plan
- Interior details
- A credible supplies list and realistic timeline
- A roster of subcontractors with current bids (if you are acting as owner-builder)
All these things build confidence that you can follow through on the lender’s investment. As a rule of thumb, anything you can bring with you that will:
Raise the confidence level of the lender about your ability to make it happen. Or
Convey the idea that he or she is financing a well-thought-through project will significantly Enhance your chances of getting approved.
Finally, be aware that at the end of construction, you will be required to provide an updated appraisal. Or a final inspection with recertification of value.
More About Qualifying for a New Construction Loan
There is quite a bit of information available online about traditional home loans, but there is very little dealing with new construction loans. Construction loans are a bit different. To begin with, adding the extra barndo component makes it doubly hard to find reliable facts, figures, and checklists.
Check With Current Barndominium Owners
Information from barndo owners who have built a barndominium that they successfully financed and built is valuable and often highly specific to your particular situation. You can get a surprising amount of helpful data just by asking a question or two in a public forum such as the Barndominium Life Facebook group. You can also research barndominiums in your area and ask owners directly.
Plan and Property Appraisal
You’ll need an appraisal for any lender you approach. This is a professional third-party estimation of what your plans and your property are worth now and what they might be worth when you are done building.
All appraisers should be adept at valuing your proposed building as if it already existed. They can combine that with an estimated worth of your property, whether you already own it or want to buy it as part of the overall construction loan.
Look for Comps
One of the more substantial obstacles you are likely to encounter is the unavailability of comps. This means already existing barndominiums in your geographic area, and one valuable ally in your search is the online powerhouse real estate search engine Zillow.
At any given time, Zillow is tracking the relative value, current sales price, and past prices of barndominiums nationwide. Just refine your search right down to the county in which you want to build or buy.
Whether the lender accepts the Zillow numbers as credible is, however, another matter. Most lenders have their own system for finding comps, and you may have to just accept what they say and try to work within the parameters of what they say they will loan.
Types of Loans for Barndominiums
There is a substantial difference between a construction loan and a traditional mortgage loan. Loans from banks, credit unions, and even farm credit institutions are typically going to be higher than conventional mortgage loans and issued for shorter terms. Usually, that’s 15 years rather than the conventional 30-year mortgage most folks are used to.
Funding your barndo construction will be done in two parts:
- The Construction Loan – Usually a one-year loan for actual construction costs
- The Permanent Loan – This will pay the remaining costs and set your new monthly payment based on the amount remaining on the construction loan, plus the traditional loan on the property itself.
Almost invariably, you will need to come up with a minimum of 20% of the loan value, in the case of a construction-to-permanent loan, that would include the total price of the property and the construction of the house.
How Does Construction to Permanent Loan Work?
This is the type of loan most lending institutions favor these days for construction projects. It is simply the conversion of a construction loan into a permanent mortgage after your contractor finishes the structure; if you are the owner-builder, the same process would apply to you.
The permanent mortgage is structured in the same way you are probably familiar with. You can either decide on a fixed rate or an adjustable loan. And then agree on the mortgage term — typically either 15 or 30 years.
You are erecting a big metal building with an apartment inside, as well as a shop, garage, or, possibly, stables for your horses. Nevertheless, your lender will understand that what you are seeking is a loan that will allow you to pay for building of the barndo shell first, then finish-out of the interior.
You would therefore settle on a fixed or adjustable interest rate with fixed payments, and your loan will proceed just as a regular mortgage would, with one important difference. The bank will cut checks at regular intervals when financing a barndominium, allowing you to pay for construction costs as they come due.
How to Go About Financing a Barndominium
Banks or Credit Unions
These have traditionally been the places in the past from whom you would obtain financing. You probably won’t have much luck here. Unless you already have a relationship in place with a loan officer at your friendly hometown or neighborhood bank.
Sadly, there are fewer and fewer of these family-owned or closely held banks in the country. These are the places where your handshake on a deal used to be all it took to get a loan. Still, these small banks — if they’re well-established in the small town near your country property — can be good candidates for a well-prepared presentation.
The same can be said of these long-standing friends of the American farming lifestyle. There will almost certainly be a Farm Credit Bureau or a similarly-named financial institution in your county. Make it a point to give them at least a part of your banking business, so when you get ready to ask for a construction loan, they will already know you and your creditworthiness.
These are banks that originate and service mortgage loans. When the loan closes, it sells the mortgage to a secondary mortgage holder.
These individuals sell loan products from a variety of lending institutions. They can be a good resource, particularly if they specialize in barndominium mortgages.
Online Loan Entities
A whole sub-industry has popped up over the last few years. They offer financial products like mortgage loans to a wide area geographically. Typically, they are affiliated with a large national or international bank.
Can You Use a VA Loan for Financing a Barndominium?
While it is possible to use a VA loan when financing a barndominium, it does have some serious obstacles.
First, contrary to popular belief, VA loans are issued by regional and national banks, not the Department of Veterans Affairs. Where the VA comes in is by guaranteeing the loans. Because these loans are guaranteed, banks are able to offer more money at lower rates than traditional mortgage products.
Because of these guarantees, the VA has many more requirements for new lenders, especially if it’s new construction.
Financing a barndominium can be a challenge, but it is certainly not impossible. By knowing what loan options are available to you, you can make the right choice. With a little bit of planning and preparation, you can be living in your dream home in no time.
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.