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A barndominium can be a popular choice for people who want to build the home of their dreams but don’t have the budget for a traditional home build. Barndominiums offer a rustic, rural feel without the price tag of a traditional custom home. There are generally two ways for someone to build a barndominium: renovate an existing barn structure or build the barndominium from scratch. Barndos are constructed with a metal frame rather than a traditional timber frame and are easy to customize to the owner’s preferences.
The average cost of a barndominium is around $265,000 for a new building; renovating an existing barn could cost more or less, depending on the state of the structure. Given the price tag, it’s likely that an aspiring barndominium owner will need to learn how to finance a barndominium before deciding whether this project is within their budget.
Before You Begin…
Getting a loan for barndominium construction can sometimes be more difficult than securing a mortgage for a traditional home. Some lenders may see barndominiums as a less conventional housing option and consider it a higher-risk project. Working with a lender who specializes in barndominium financing might make it easier for borrowers to obtain a loan.
Before building, it’s important for aspiring barndo owners to consider all of the costs of building a barndominium, including homeowners insurance, potential well and septic needs, and interior finishes like the best interior paint and decor, which may not be included in the build cost.
STEP 1: Get quotes from barndominium companies to determine your budget for the project.
Aspiring homeowners will want to start the process by consulting one of the best barndominium building companies. Barndominium companies typically provide either prefabricated kits or start-to-finish building services. Prefab barndo kits are commonly delivered to a homesite and can be a way for someone to build a budget barndominium. However, prebuilt barndominiums may have limited design and layout options for a home. Custom barndominium builds offer greater flexibility in terms of design, but they often cost more than a prebuilt kit. Some builders offer a range of pre-designed barndo layouts that can be customized as an option somewhere between the two.
Although barndominiums cost less than traditional homes, building a barndominium is still a major financial project. Many barndominium plans and kits only provide the exterior frame of a home. This lets barndo builders customize their interiors, but luxury finishes, labor costs, and interior construction materials could quickly increase the price of the build. Those who are considering this type of home will want to consider the full finished barndominium cost when establishing their budget to build a barndominium. Opting for luxury finishes, such as the best barn doors for inside the home or the best ceiling fans for large open-concept spaces, can increase the price, though would-be home builders can choose more basic finishes to keep the costs down.
STEP 2: Check your credit score and credit report.
A borrower’s credit score can affect their cost to build a barndominium. Generally, someone with a higher credit score will qualify for better loan terms when obtaining financing to build their barndo than someone with a lower credit score. For example, a borrower with excellent credit might be offered a lower interest rate, saving them thousands of dollars over the course of their loan. Lenders offer better terms to borrowers with good credit. This is because a higher credit score indicates a lower risk to the lender. Borrowers with good or excellent credit are considered to be more likely to make on-time payments on their loans and less likely to default than those with fair or poor credit scores.
After determining their budget and the style of the barndominium they want to build, borrowers may want to check their credit report. Doing so gives borrowers a better idea of what loans and terms they might qualify for. Borrowers who have lower credit scores may want to consider waiting to build their barndominium until they’ve increased their score through on-time payments on credit cards or car loans.
STEP 3: Consider a conventional mortgage loan to finance your barndominium build.
A conventional mortgage typically refers to a traditional mortgage for an existing structure. In most cases, the borrower pays a down payment (usually around 3 percent to 20 percent) and the loan amount is for the remaining cost to purchase the property. Conventional mortgages often have fixed interest rates and terms of 15 to 30 years.
Some barndominium properties may qualify for a conventional mortgage from one of the best mortgage lenders to use as a barndominium loan. For example, if a barndominium is already built on a property, the potential borrower may be able to get a traditional mortgage for the home. Existing structures, such as an older barn that the borrower plans to convert to a living space, could also potentially qualify for conventional mortgages. Borrowers may be able to use mortgage funds to purchase the existing property and start renovations. However, since many lenders consider barndominiums “nontraditional” housing, a conventional mortgage may not be the best option, and borrowers may need to look for other financing options.
STEP 4: Look into construction loans as an option.
Those who want to build their barndominium from the ground up might consider a construction loan. One of the requirements of most construction loans is that the borrower provide the lender with detailed plans for their build. The best construction loan lenders may also require the borrower to use an approved builder for the construction process. Barndominium construction loans typically come in two varieties:
- Construction-to-permanent loans
- Construction-only loans
Construction-to-permanent barndominium loans roll a loan for the construction of the house and a traditional mortgage into one barndominium mortgage. Generally, the borrower only pays interest on the loan while the home is being built. During construction, the lender releases funds directly to the approved builder in each building phase. When construction is complete, the loan converts to a traditional mortgage and the borrower begins making monthly payments. A construction-only loan only provides funds for the construction of a barndo. After construction wraps up, the borrower pays off the loan and secures a new traditional mortgage for the property.
STEP 5: See if you qualify for a USDA loan for your barndominium.
Barndominiums are an especially popular choice for those who live in rural areas. Barndos tend to have a more rustic look inside and out, making them a good fit for a country landscape. Building in a rural area opens up specialized financing for barndo owners in the form of U.S. Department of Agriculture (USDA) loans. The USDA home loan program helps low-to-moderate-income borrowers in rural areas qualify for a mortgage. This program allows borrowers to get barndo financing with no down payment requirement.
The USDA doesn’t directly lend to borrowers; instead, borrowers work with the best USDA lenders, and the USDA guarantees a portion of the loan to decrease the risk for lenders and encourage them to lend to those who might not qualify for a conventional mortgage. If a borrower defaults on a USDA-backed loan, the USDA pays the guaranteed portion of the mortgage. Generally, borrowers still need to meet lender requirements, such as a minimum credit score, and the property must be located in a designated rural area to qualify for a USDA loan.
STEP 6: Consider applying for an FHA loan if you qualify.
Like the USDA, the Federal Housing Administration (FHA) offers a mortgage loan program to help future homeowners build or purchase their dream homes. The FHA home loan program provides government backing on qualified construction loans or mortgages from the best FHA lenders. A borrower typically has to meet the lender’s credit and debt-to-income ratio (DTI) requirements. Additionally, the FHA program requires borrowers to pay for FHA mortgage insurance as part of their monthly payments. However, qualified borrowers may be able to get a mortgage with as little as 3.5 percent down.
The FHA program has two types of construction loans: construction-to-permanent loans and renovation and rehabilitation loans. FHA construction-to-permanent loans provide funds to build the barndominium and convert the loan to a traditional FHA mortgage when the home is finished. On the other hand, an FHA rehabilitation loan could be a good option for someone hoping to renovate a barn into a barndominium. The rehabilitation loan program lets borrowers roll renovation costs into their mortgage when purchasing an existing barndominium that needs renovating.
STEP 7: If you’re in the military or are a veteran, a VA loan could be an option.
Another government-backed loan program option for barndominium builders is the Department of Veterans Affairs (VA) loan program. VA loans are only available for active military members, veterans, and in some cases,military spouses. Similar to other government-backed loans, the VA guarantees a portion of a barndominium VA loan. This guarantee makes lending less risky for the best VA mortgage lenders (like Veterans United, Navy Federal Credit Union or PenFed Credit Union) and typically helps borrowers secure more favorable loan terms. One of the biggest benefits of the VA loan program is that there’s no requirement for a down payment. In addition, VA loans tend to have lower interest rates and credit requirements than other types of loans.
The process of obtaining a VA loan to buy or build a barndominium may have sizable hurdles for veterans and military members. The VA loan program often has strict appraisal requirements for financing and it may be difficult to find comparable barndo properties in the borrower’s area. It may also be difficult for borrowers to find a VA-approved lender that offers VA construction loans or VA mortgages. Despite these potential obstacles, veterans and military members will want to take the time to speak to a VA lender in their area. Because of a VA loan’s lower interest rates and no down payment requirement, it can be a very attractive option if it’s available.
STEP 8: Gather the required paperwork for your loan of choice.
After choosing a type of barndominium loan that works best for them, borrowers can start gathering documents to apply for financing. Most lenders ask borrowers for information about their finances, including income, down payment savings, and employment. Lenders will also typically require borrowers to include detailed plans and designs for their barndominium.
Some lenders require potential borrowers to have a bid from a barndominium builder or contractor to apply for a loan. Even if a lender doesn’t require a bid, having one can help show a borrower’s commitment to the project. Borrowers may also want to provide a detailed list of necessary supplies to build the barndo and a realistic building timeline. In general, the more information a borrower gives lenders about their project, the better their chances of securing a barndominium loan.
STEP 9: Apply for preapproval with several lenders and compare loan rates and terms.
It’s recommended that those wanting to build a barndominium carefully consider their loan and lender options before applying. Borrowers may want to consider several lenders in their area to determine what loan programs are available, including local banks, farm or agricultural lenders, and private mortgage companies. Most lenders are happy to talk to potential borrowers about their loan options and chances of qualifying for a loan.
Additionally, borrowers can increase their chances of getting the best loan terms for their barndominium by applying for preapproval from multiple lenders. A preapproval is a letter from a lender letting a borrower know what type of loan terms they qualify for based on their financial and credit information. Getting preapproval documents from different lenders lets borrowers compare loan terms between lenders. For example, one lender may be able to offer a borrower a lower interest rate but require a higher down payment. Another lender, however, may have higher interest rates but no down payment requirement. By getting preapprovals from at least two lenders, the borrower can decide on the loan that makes the most sense for their financial situation.
STEP 10: Apply for the loan and start building once you have received funds.
Barndominium loan applications are similar to other mortgage applications but with added requirements for the barndominium design plans and contract with an approved builder. After the borrower fills out a loan application, the lender will send the application to underwriting and order an appraisal, if needed. If the applicant qualifies for a loan, the lender will send a loan agreement for them to sign.
Borrowers and their barndominium builders may want to double-check construction requirements with the lender before starting construction. For example, a lender might approve plans for a steel-sided barndominium. During construction, the borrower decides they’d like to switch to a brick barndominium. The builder may have to get permission from the lender to make changes to the approved design plans. Making changes without speaking to the lender could potentially slow down the construction process if the lender withholds funds from the builder.
Building a barndominium can be a great way for someone to customize their dream home without the higher cost associated with building a traditional house. Additionally, many people enjoy the idea of adding a barn or workshop space to their home through a barndominium. Would-be barndo builders can use these 10 steps to help them navigate financing a barndominium.
