Despite the popularity that barndominiums have been gaining because of their flexibility and low maintenance, financing them remains a challenge. Most lenders shy away from them because it’s hard to perform property appraisals on them compared to traditional homes. Can an FHA (Federal Housing Administration) loan be a solution?
You can buy a barndominium with an FHA loan if it’s located in an area with other barndominiums to help conduct a property appraisal. The appraisal helps determine the property’s market value and ensure it meets the minimum standards for the loan requested.
This article explains all the essential details concerning acquiring a barndominium using an FHA loan. It covers how financing a barndominium with an FHA loan works, the conditions of obtaining the loan, how to apply for it, and the pros and cons of funding a barndominium using an FHA loan.
How Financing a Barndominium With an FHA Loan Works
The financing options of a bandominium are not many. Most conventional financiers avoid financing barndominium because they lack comparables in the market.
Fortunately, FHA loans are easier to obtain than conventional ones if there’s a way of determining the worth of your barndominium.
FHA Loan Property Appraisal Process
Before the FHA issues you a loan to acquire a barndominium, there must be a property appraisal to determine two things:
- The market or fair value of your property.
- If the condition of the barndominium is commensurate to the loan you’re borrowing.
For the appraisal process to be successful, your barndominium must be located in an area with other similar barndominium for comparability purposes. If yours has two bedrooms, there must be other two-bedroom barndominiums around.
An appraiser will visit your barndominium, assess its amenities and furnishings, compare it with recent sales around the area, and assign a market value.
Low and High Appraisal
Various scenarios can arise after the appraisal. First, the value of the barndominium could be lower than the amount of loan you intend to borrow. Because the FHA cannot give a loan higher than the value of the barndominium, you have three options in this case:
- Renegotiate the value with the seller. Let’s say the seller has set the price at $400,000, and the appraisal amounted to $380,000. You can ask the owner to reduce the amount to match the appraisal or agree to pay a specific amount above the appraisal value in writing.
- Make up for the difference. You can use out-of-pocket cash to top the balance. But, you’ll be paying more than the barndominium is worth.
- Withdraw from the offer. If the seller is unwilling to budge and you have no cash to top up, you’ll have no choice but to drop the purchase agreement because the FHA cannot fund such a purchase.
If the appraisal comes at a higher price than you had agreed with the seller, you should proceed with the transaction.
For FHA to disburse your loan, you have to make an upfront payment or a percentage of the purchase price. Your down payment amount should be proportional to your credit score, which ranges from 300 to 850. Usually, the FHA requires a minimum down payment of 3.5% for a credit score above 580.
FHA Mortgage Insurance
Once you receive an FHA loan, you’ll have to pay a mortgage insurance premium (MIP) to protect the lender from making losses if you default on your payment. You pay your MIP upfront, usually 1.75% of your loan. You also pay annually, at around 0.45% – 1.05% of the loan, depending on the payment duration.
Conditions for Obtaining FHA Loan to Buy a Barndominium
Though FHA is not as stringent as conventional lenders, you must meet certain conditions to obtain an FHA loan. These conditions include:
- Location. The barndominium must be located in an area with similar barndominiums to help determine the property appraisal value.
- A credit score of 500. With a credit score of between 500 and 579, you’ll make a 10% down payment, and if it’s 580 and above, a 3.5% down payment.
- Your creditworthiness. The lender will check your credit payment history for the past two years. A history of bad debts, bankruptcy, and foreclosure can impair your credit report, and you can only obtain the loan after proving you’ve made amends.
- Proof of steady income. The sure thing about debt is you have to repay it. The lender will need assurance that you can repay the loan by proving you have steady employment or self-employment income.
How To Apply for an FHA Loan
Although the FHA insures FHA mortgages, it does not issue loans. It is private lenders such as banks that disburse money to borrowers. When applying for the loan, you follow these three steps:
1. Find an FHA-Approved Lender
Your FHA loan application process begins by researching a suitable lender. This should not be daunting because most financial institutions, such as credit unions and banks, can issue FHA loans. However, you’ll have to consider the credit score and the application process that suits you.
2. Gather Your Documents
Lenders will need the following documents to verify your application:
- Social Security Number to prove income.
- Bank statement.
- W2s dating back two years.
- Financial statements if you’re self-employed.
- Tax returns dating back two years.
3. Submit Your Application
You can complete your application process online or manually, depending on your chosen lender. Once you apply, approval can take around 30 to 45 days. You should apply with more than one lender to maximize your chances of getting approved and allow you to negotiate more competitive terms.
Now, since barndominiums are unconventional homes, you may not be able to obtain a thirty-year mortgage. If you’re interested in learning more, I recommend reading my guide on how long you can finance a barndo.
Pros and Cons of Using an FHA Loan to Buy a Barndominium
- Low down payment. The maximum amount you can put as a down payment for an FHA loan is 10%. This is favorable compared to conventional loans, which require as much as a 20% down payment.
- Lenient credit score. Most traditional lenders will dismiss you if your credit score is below 620. But with a credit score of 500, you can obtain an FHA loan.
- It’s ideal for all income earners. If you’re a first-time homeowner, an FHA loan makes it possible to own a home without straining you so much financially.
- You must reside in the barndominium. To qualify for an FHA loan, you must live in the barndominium for at least one year. Failing to comply with this requirement leads to mortgage fraud.
- You can’t escape MIP. You’ll have to pay insurance premiums as long as your debt lasts to protect the lender.
- Borrowing ceiling. The FHA limits the amount of money you can borrow. Right now, the limit is $420,628 in a low-cost area. If your barndominium is pricey, you’ll have to look for other financing options.
FHA loans provide a cheap way of financing barndominiums. However, because they are relatively new and don’t fit in the traditional buildings class, it becomes hard for lenders to perform property appraisals. To obtain an FHA loan for a barndominium, there must be other similar ones around the area to help determine its fair value.