One of the challenges of building a barndominium is finding a lender who is willing to approve a loan for construction. The lending requirements are often strict, such as requiring a large down payment and a high credit score.
Luckily, the United States Department of Agriculture (USDA) may have a solution. Obtaining a USDA loan for barndominium construction may allow you to build your dream home with no money down.
Editor’s Note: Looking to find a barndominium loan?
What Is a USDA Home Loan?
A USDA home loan is a type of loan guaranteed by the USDA and issued by approved lenders throughout the country. The USDA loan program is designed to increase the availability of housing for middle-income and low-income households.
A USDA construction loan is an all-in-one construction loan, which is also sometimes referred to as a construction-to-permanent loan. The loan covers the cost of construction and automatically converts to a mortgage after the completion of your barndominium.
USDA construction loans often come with competitive interest rates. The current interest rate for low-income borrowers is 2.5%. Middle-income borrowers receive a slightly higher interest rate based on current market rates.
The loans have fixed interest rates, which means that the rate remains the same throughout the life of the loan. However, borrowers may apply for refinancing through the USDA program after the completion of the barndominium.
Benefits of a USDA Loan for Barndominium
Applying for a USDA loan for barndominium construction offers many benefits, especially for those with limited income:
- No down payment
- Lenient eligibility requirements
- You only close once
USDA loans are not just for new home construction. Home seekers can apply for a USDA loan to purchase single-family homes, including existing barndominiums.
No Down Payment for USDA Loans
USDA loans offer 100% financing, which means that you do not need to make a down payment. If you qualify for the loan, you do not need to start making payments until after the barndominium is built.
Construction loans obtained through traditional financing often require a 20% down payment. The average cost of new barndominium construction ranges from $73,000 to $228,000, requiring a down payment between $14,600 and $45,600.
FHA loans are an alternative option for those with poor credit or limited income. Yet, FHA loans still require a down payment of about 3.5%. With an FHA loan, you may need a down payment of $2,555 to $7,980.
A USDA loan for barndominium allows you to build with no money down, which may give you more time to prepare your finances.
Lenient Eligibility Requirements
The eligibility requirements are relatively lenient compared to traditionally financed loans. Along with 100% financing, USDA loans come with lower income requirements.
You are less likely to be denied for having a limited monthly income. Keep in mind that you still need a stable source of income, as the application process requires proof of at least two years of employment.
USDA Loan For Barndominium Come with Fewer Closing Costs
With a traditional construction loan, you need to complete the closing process twice. You first need to close on the land, which involves an appraisal and closing costs. You then need to pay closing costs and appraisal fees after the construction of the barndominium.
With a USDA construction loan, you only need to close once. You can buy land, build a barndominium, and finance the home with a single loan.
The loan covers everything, including buying a lot, inspection fees, administrative fees, builder’s insurance, and even landscaping.
Drawbacks of Getting a USDA Construction Loan
Not everyone qualifies for a USDA loan. Some of the potential drawbacks to a USDA loan are related to the eligibility requirements:
- USDA loans may take longer
- A limited selection of lenders
- You can only build in approved areas
The requirements vary depending on your income and state. Before choosing to explore USDA loans, you should search for the USDA loan eligibility requirements in your state.
USDA Home Loans Take Longer to Process
While obtaining a USDA loan is convenient, it can take longer compared to traditional financing. As the loan is guaranteed by a government agency, each stage must follow strict requirements.
The USDA must first review the application and verify your eligibility before the lender can approve the loan. This may take an additional two to three weeks compared to applying for a standard home loan from a bank.
Builder approval, permits, and the final appraisal must also follow the USDA requirements for the loan program. On average, borrowers wait up to a year before the completion of their new homes. However, the lengthy administrative processes are a small trade-off when you consider the benefits of a USDA loan.
Few Lenders Offer USDA Construction Loans
Not all lenders offer USDA loans. The lack of lenders that offer USDA home loans may prevent you from choosing a bank that you have an existing relationship with.
Depending on where you live, you may struggle to find a lender in your region that offers USDA loans, forcing you to expand your search to national lenders or banks in neighboring areas.
Where Can You Build a Barndominium with a USDA Loan?
USDA home loans are only available for new and existing homes in specific rural and low-income areas. The USDA Income and Property Eligibility Map allows you to search addresses to determine eligibility.
The eligible areas are typically rural towns and cities with populations of 35,000 or less. Some larger, low-income areas may be covered by the program.
As barndominiums are typically found in rural areas, choosing a USDA-approved area for your barndominium should not be too difficult.
The USDA loan is flexible when it comes to acquiring land for a new home. However, you need to be prepared to start building immediately after getting approved.
You cannot use the loan to purchase land and build later. The loan may be used to cover the purchase of land or pay off a new loan used to buy land.
For example, you may find the perfect plot and not want to wait for USDA approval. You can obtain a standard loan for the land. The USDA loan for barndominium is then used to pay off the land and cover construction.
What Credit Score Do You Need for a USDA Loan?
The credit score requirements vary depending on the lender. Most lenders require a credit score of at least 640 to qualify. However, borrowers can still receive approval with a credit score as low as 600.
A lower credit score requires manual approval by the underwriter. To receive manual approval, you may need to demonstrate one or more compensating factors. For example, you may need a low debt-to-income ratio, long job history, or enough savings to cover several mortgage payments.
Additional Considerations Before Getting a USDA Home Loan
A USDA loan is beneficial for specific situations but may not work for everyone. Along with a decent credit score, you need to show two years of consistent employment.
Applicants also need to pay attention to the income limit in their state. USDA construction loans are only available for households with income below a certain threshold. However, the threshold varies from state to state.
In Texas, the average income limit for a USDA loan is $112,850. A household with five or more occupants may receive an income limit of $148,950. In California, the income limit is between $135,250 and $178,550.
Borrowers also need to have stable finances, such as no gaps in income, no bankruptcies in the past two years, and no late or missing rent payments.
If you get approved, you must choose from a list of approved builders. You cannot act as the owner-builder. The contractors must be licensed, insured, and have a minimum of two years’ experience building new homes.
Alternatives to USDA Loan for Barndominium Construction
Borrowers who do not meet the eligibility requirements for USDA home loans may need to consider alternative financing options. Along with conventional construction loans, you may qualify for FHA or VA loans.
The Department of Veterans Affairs offers a VA one-time close construction loan for qualified active-duty military members and veterans. As with the USDA loan, a VA loan offers up to 100% financing, which means no down payment.
The Department of Veterans Affairs does not set a minimum credit score. However, most lenders require a credit score of 620 or higher for the standard underwriting process.
The Federal Housing Administration (FHA) offers FHA loans, which include many of the same features provided by USDA loans. An FHA loan is another type of government-backed loan for moderate-income and low-income borrowers.
You only need a credit score of 600 to get approved for an FHA loan. However, most FHA loans require a down payment of at least 3.5%.
USDA loans are available for middle-income and low-income households. Compared to other financing options, USDA loans for barndominium construction tend to offer better terms.
You can build a barndominium with no money down and receive a decent interest rate. However, you need to meet the eligibility requirements, which include an income cap and a preferred credit score.
If you are worried about getting approved for a construction loan through traditional financing options, start searching for USDA-approved lenders.
Learn more on construction-only loans and a construction-to-permanent loan when you get the Barndominium Life Program and lots more info on lending programs.
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.
Gail currently spends her free time geeking out about what’s new and trending in the world of barndominiums.
She is the former executive editor of BarndominiumLife.com and loves working with the team and members of the barndominium community. She now contributes to the blog on occasion, but only when she feels like it!