Will VA/Banks Finance a Barndominium?Home Loan, Mortgage Guide

Will VA or Banks Finance a Barndominium Home Loan Mortgage How to Guide
Will VA or Banks Finance a Barndominium Home Loan Mortgage How to Guide

Barndominiums are utility buildings that were mostly found in Texas in the past. Today, more people are embracing them as their main residence. The structures are furnished with everything needed to make a cozy living space, giving conventional homes a proper run, but how easy is it to get financing for barndominiums? Will a bank or VA loan work here?

While it is possible to get a bank or VA loan for a new barndominium construction, the rigorous screening process you’ll have to go through makes it very difficult. Local banks where you hold an account and farm credit lenders are generally the best bet for a barndominium construction loan.

The rest of the article will take a deeper look into what you need to know about barndominiums and how you can finance them.

What Is a Barndominium?

In the past, a barndominium referred to the living quarters built inside a barn. Today, the definition has changed a great deal. Also known as barndos, these have gone from a barn-like exterior with simple living quarters nestled between everything from shops to animal sheds to complete living spaces.

The modern barndominium comes with an exterior metal-frame, but with all the interior comforts you’ll expect to find in a conventional home. The cheaper cost of building one of these was responsible for their rise in popularity. However, with the wide range of customization options, the cost of a barndominium can match the price of some standard homes, ranging from $90-$150 per sq. ft or more.

Finding a Lender for Your Barndominium Construction

As mentioned above, many getting a bank or VA loan for a barndominium construction can be challenging. This is because most lenders are still unsure about them. Even though these structures are growing in popularity, they are still not as common as typical houses.

The lenders only get occasional applications for barndominium loans, which means that they won’t devote a lot of resources to learning the intricacies of such a construction. The result is their general unwillingness to risk financing a construction model they don’t understand.

However, this doesn’t mean that it is impossible to get a loan for a barndominium. Getting the right information and knowing the kind of lenders to approach will ensure your attempt to get financing for your barndo will be no different from applying for a traditional mortgage loan.

As you’ve already seen, your local bank where you’re already a customer and farm credit lenders will be more open to giving you such a loan compared to national lenders once you have a good credit rating, solid construction plans, and exact contractor or subcontractor bids. This doesn’t mean it’s impossible to get loans from national lenders, but the odds are lower.

How to Secure Barndominium Financing

Here are some tips that could help increase your chances of getting barndominium financing.

Go Prepared

As is the case with other financing applications, you need to be prepared when going to see a lender for a barndominium loan. For starters, you shouldn’t go with building plans roughly drawn on a piece of paper. Ideally, you should go with professional plans drawn by an architect, but if you don’t want to pay for this service, you can look for barndominium blueprints online.

You can also create your own designs with any decent software that can render detailed 3D drawings. Some of them come with a steep learning curve, but learning how to use one can save you money. Look for options that come with a money-back guarantee or a free trial at the very least.

Whether you design the barndominium on your own or enlist the experts’ help, you need to take the blueprint and a detailed list of materials needed for the initial meeting with the lender. You also need to provide them with a credible timeline for your construction.

Provide As Much Details As Possible

You need to give the lenders as many details as possible to improve your chances of securing the loan. We’ve already talked about your blueprints and schematics. Still, you’ll also need to provide information on your interior details and a list of the contractors or subcontractors (if you are an owner-builder) working on the project.

These details will give the lender some confidence that you know what you’re doing and that you’ll deliver on the lender’s investment. It also shows that you’ve properly thought through the project. You should keep in mind that, if you qualify for the loan, you’ll be required to provide the lender with an updated appraisal or recertification of value at the end of your construction.

Talk to Existing Barndominium Owners

People looking for information on loans for traditional homes don’t have to sweat to find everything they need online. As you go into new construction loans, however, the information pool dwindles. It is even worse for barndominiums. To remedy this situation, your best bet is to talk with current barndominium owners.

Most of these owners have successfully financed and built their barndos, so they will have a lot of valuable and highly relevant information. To reach them, you can start by asking questions in public forums like this Facebook group.

Of course, you still need to verify the information you find in such public domains. Still, some of them are genuinely helpful communities that can save you a lot of time and energy and help you get closer to securing a loan and funding your barndo dreams.

Get a Plan and Property Appraisal

For every lender you approach, you need to get an appraisal. This refers to a third-party estimate of the current worth of your plans and property and what they will prospectively worth by the time you have completed the building process.

The best appraisers know how to value your proposed construction as if it already exists, and they can combine that value with an estimate of what your current property is worth.

Use Zillow

If you’d like to get an idea of the cost of barndominiums in your area, you may find it hard to locate existing options near you. This is where Zillow, the online real estate search engine, can help. They are always keeping track of the relative value and the current and past sale price of barndos around the country. Here’s the link to visit.  

Once you are on the page, you can narrow down your search to the county where you are looking to buy or build. However, you should note that some lenders may not accept the numbers from Zillow and will instead choose to find related properties on their own. In this case, you’ll have to find a way to work with the numbers they provide.

Differentiating Between Barndominium and Traditional Mortgage Loans

Barndo construction loans and traditional mortgage loans differ greatly. Conventional mortgage loans tend to come with lower interest rates and can be issued for up to 30 years. Loans from banks, credit unions, as well as farm credit institutions, on the other hand, are only issued for a maximum of 15 years.

Also, barndominium construction loans will come in two installments. The construction loan is a one-year loan that covers the construction cost for the building, while the permanent loan (which is typically used for furnishing the barndo) will come later. Your new monthly payment will be based on the remaining amount from your construction loan and the new permanent loan.

Places to Look for Barndominium Financing

There are four major lender options you can consider when looking to finance your barndominium. They are covered below.

Banks or Credit Unions

These are the first port of call when you are looking to get financing. However, they are the most difficult lending options to go with as a prospective barndominium builder without an existing relationship with the loan officer, or you are dealing with your small neighborhood bank where you are well-known.

Unfortunately, very few of these small banks remain in the country today, where your familiarity with the staff and presence in the community is enough to get a loan. However, if you have an account in a small local bank, it doesn’t hurt to target them with your presentation and loan-application. You’ll most certainly have better luck here compared to the multinationals.

Farm Credit

Farm Credit Bureaus or similar institutions have been helping farmers across the country for a long time. You’ll most likely find one of these in your locale. If they already handle part of your banking business, they’ll know your creditworthiness and will be willing to provide you with a loan.

If you don’t have a file with one of these banks, but you intend to seek financing for a barndo in the future, you should sign up with them now.

Mortgage Banks and Brokers

Mortgage banks generate and service mortgage loans. They sell the mortgage to a secondary mortgage holder when the loan closes. The challenge lies in finding one that has a decent history in financing barndominiums.

On their part, mortgage brokers save you the stress of hunting for mortgage deals on your own. They know the institutions that can provide financing for your project, and will provide you with general guidance on how to secure the loans.

Online Lenders

Several online lenders have entered the market over the past few years. You can find a few of them here. Some of these are true standalone brands, while some are affiliated with multinationals. 

However, the annual percentage rate on these loans can be very high. Even with the best credit rating, you may get a 6% APR on the best deals.

What About VA Loans for Barndominium Construction?

As you’ve seen above, it is possible to get VA loans when looking to construct a Barndominium as an eligible veteran. The loans are guaranteed by the Department of Veterans Affairs, making them much cheaper than products from traditional lenders.

They don’t provide the loans. The guarantee is provided to other lenders. This means that borrowers won’t have to make any down payments and may also get a loan without mortgage insurance.

However, the fact that the Department of Veterans Affairs guarantees the loans also means that they enforce pretty strict rules on who can qualify for a loan compared to traditional lenders.

For instance, there’s a required down-payment, and there is a cap or restriction on origination fees (and others related to it). On new construction loans, builders are required to show two years of their financial records, proof of liability insurance, proof of creditworthiness, and more.

Most of these restrictions are in place to protect the VA loan guarantee program. Still, they severely limit your chances of getting the loan, especially if you are considering going the owner-builder route. You are not only thinking about whether you qualify, but you also have to worry about the builder side of things.

Even if you want to get a builder, you’ll have to look long and hard to find one that won’t fall short of the scrutiny from the VA. This is especially true if you don’t live close to major cities where finding a builder that can easily go through the process should be easier.

Most banks and traditional lenders will not go to this length with their requirements. This is why some experts recommend getting your barndo construction loan from other institutions and then refinance it using a VA loan.

If you are thinking about getting a VA loan for your barndo because banks and credit unions are a hassle, you need to think again. If you can’t get past the scrutiny from the traditional lenders, your loan application most definitely won’t get past the VA’s process.

Tips to Keep in Mind When Looking for Lenders for Barndominium Financing

After you’ve found prospective lenders for your barndominium, you should do a few things to ensure you get approval from at least one of them and get a better deal overall.

Interview the Lenders

Before you choose any of them as your final option, you should talk with as many of them as possible to find their experience level with this type of loan. Some financial institutions ended all kinds of residential construction loans after the financial crisis of 2007 and 2008.

You should also put lenders with a separate mortgage and residential construction desk at the bottom of your list. This is because you could get approval from the mortgage department, only to have the construction desk asking for higher down-payment or making other demands that will make it hard for you to continue with your project. Working with two different departments in the same institution is a sure way to waste your time.

Know the Cost of Your Project

We’ve already talked about how you should provide as much detail as possible in your loan application, but you need to demonstrate excellent knowledge of your project’s entire cost. Remember, lenders want to be sure they are taking on responsible risk by approving your loan request. You need to be confident when discussing the numbers to show them that you’ve done your research.

Work Out How Much Capital You Want to Invest

There is nothing wrong with saying you want to invest as little as possible in your barndo project, but when discussing with a lender, they want to have an idea of what you can afford. They typically have a minimum expectation, so you have to be as honest as possible. Give them the realistic sum you’ve arrived at based on your research and your financial situation. You should also know your sweet spot when it comes to monthly repayment plans.

Decide on Whether to Use Builders or Go DIY

It makes sense to allow professionals to handle your barndominium construction in many cases, but if you choose to do things on your own, you could end up saving thousands. However, the savings come at the risk of not securing a loan in the first place.

If you present yourself as an owner-builder in the application process, you must show you have done your research and be ready to masterfully deflate any concerns raised by the lenders. If you don’t trust your ability to come through this process, you should rethink hiring professional barndo builders to get the job done.

Sort Your Down Payment

You’ll be required to make a down payment of 20% of the expected loan amount when you are trying to get a loan for your barndo. You need to know where the money is coming from and ensure you can get it in a moment’s notice. It’s not a good idea to borrow the loan amount, and many lenders will not approve your loan if you tell them you are getting the down payment as a loan from elsewhere.

Be Ready for the Length of the Process

The loan approval process and the length of time it will take to complete your barndominium may be longer than you expected. You should be ready for it and stay patient. It is hard to put a timeline to the process because it will vary from one lender (and builder) to another.

Talk to a Financial Adviser

If you ever feel overwhelmed by the process of securing financing for your barndominium loan, you should consider enlisting the help of a professional. Generally, you should always get advice before making any financial decisions, but it is even more important at this stage. The financial adviser can help you find the best financing options, or recommend a company to work with where necessary.

Remember, you may have to live with your decision for 15-30 years.

Barndominium Loan/Financing FAQs

Here are some questions commonly asked by people looking for barndo financing.

What Does a Construction to Permanent Barndominium Loan Mean?

This is this type of loan most institutions will offer for many construction projects. It means that the construction loan is converted to a permanent mortgage after your contractor has completed the project. The same applies even in owner-builder arrangements.

Once converted to a permanent mortgage, everything is near similar to what you’d get with conventional mortgage deals. The mortgage term is usually 15 or 30 years, and the interest rate can be fixed or variable.

What Is the Down Payment Amount for a Barndo Loan?

Generally, you have to come up with 20% of the loan value. If the loan is structured as a construction-to-permanent one, this would mean 20% of the total price of the property and the construction of the house.

Can I Get a Loan for Just the Exterior?

If you’d like to take time to finish the interior of your barndominium, you won’t need construction to permanent loan. You should apply for a vanilla construction loan that will be enough to complete the barndo structure.

In some cases, the land will be used as the collateral, unless you have another traditional home that can serve this function. Where this is not possible, they may explore other options such as bonds and stocks.

Is It a Good Idea to Pay Cash for a Barndominium?

If you’ve been planning your barndominium for a while, you probably have already saved up some cash. There’s nothing wrong with using it for the construction. It saves you from the hassle of finding and working with lenders. You also don’t have to worry about getting through a rigorous selection process and paying interest on a loan for years. As long as you don’t have a better plan for the cash, you can ignore taking any loans.

Is There a Fee to Apply for Barndominium Financing?

Most lenders will not charge a fee when you are applying for a barndo loan. However, if you choose to work with mortgage brokers, you may be charged a consultation fee. You should find out all the fee-related details before you choose to work with any of them.

Is It Possible to Get Barndominium Financing Without a Credit Score?

If you don’t have a credit score, you’ve likely paid all your debt. This is nothing to be worried about. In fact, most lenders will be happy to know you don’t have any debt. However, you’ll have to go through the process of manual underwriting. You’ll have to provide some more paperwork for review.

Manual underwriting can make the loan process a little longer, but the wait is typically worth it, especially if you have a healthy financial standing. You should note, though, that some lenders don’t offer manual underwriting. It doesn’t mean you won’t qualify for a loan elsewhere; rather, it says that the company doesn’t have the personnel or system to operate outside the credit rating algorithms.

List of Lenders for Barndominium Constructions

Below are some lenders that have some history of providing loans for barndominium constructions.

Compeer Financial

Compeer Financial is a company that has been serving customers in the agriculture industry for more than a century. You can apply for a bank loan if you are constructing a barndo on a farm or if the construction can improve your farming business in any way.

New Century Bank

New Century Bank has come up with many online discussions around Barndominium loans. The brand can offer all kinds of personal and business loans, and with their understanding of the barndo market, you won’t have to spend a lot of time explaining your needs to the loan officers.

Home Loan Investment Bank

Home Loan Investment Bank provides loans of up to $65,000 with no prepayment penalties to homeowners. You should consider them if the maximum loan amount can take care of your barndo construction needs. They provide loans to customers all across the country.

Bank of America

Bank of America offers a Home Equity Line of Credit, which is secured against your home. You get a loan that can be used for large projects such as building a barndo. The loan has a lower interest rate than other types of loans, and the interest rate is typically tax-deductible. As you pay down the outstanding balance, you’ll be able to borrow more money in the future.

These are some of the lenders you can start looking at for your barndominium financing. Go over their requirements and see if they are a good fit. Here is a two-part video on how to finance and build a barndominium from Texas Construction:

Final Words

Getting a loan for a barndominium is hard, but it is possible if you look in the right places. VA loans are the hardest to secure, while some banks don’t have a process in place for barndominium construction lending. 

If you find a lender with a history of providing loans to prospective barndo owners, it’s all about getting through their selection process. This will hinge heavily on all the basics, including your creditworthiness, but you also need to demonstrate a proper understanding of all data relevant to your project.