Barndominiums are gaining popularity in the U.S. as a lower-cost alternative housing option that offers an appealing rural lifestyle. Unsurprisingly, banks are seeing increased homebuyer interest in mortgages for these homes. But what kind of loans are available for barndominiums, and how long can you stretch out the repayment?
You can finance a barndominium for up to 30 years like a typical mortgage, but it’s not a given. Many national banks avoid financing unconventional homes like barndominiums, while some local banks and credit unions stipulate shorter loan terms of up to 15 years.
Read on to learn more about financing barndominiums, why it’s more challenging to secure financing for these, and the types of loans available.
Banks typically don’t care what kind of house you’re building or buying; they’ll lend you the money if they can profit from the loan.
They’re risk-averse and have stringent processes to assess a potential customer’s ability to repay a loan. The assessment includes checking the customer’s credit score, income, income-to-debt ratio, and the property’s valuation.
This valuation is usually done by a third-party appraiser who compares the property against similar properties in the area. The appraisal is arguably the biggest hurdle to cross in barndominium financing.
Although barndominiums, or barndos for short, are becoming increasingly popular, they account for only a tiny fraction of all homes in the country. They’re concentrated in a few states, such as Texas, Tennessee, Montana, and parts of Arizona, Georgia, Missouri, and Idaho.
Often, lenders find it hard to appraise the actual value of a barndominium because of a lack of comparable properties in the area. Most big banks decline to finance barndos as they comprise an insignificant share of the home loan market.
This situation will likely change if barndominiums continue to increase in popularity. In fact, your chances of securing financing for a barndo are higher in places like Texas, where they are relatively more common.
Generally, a barndo is 20% to 30% cheaper than a traditional home of similar size and amenities.
Barndominiums are usually constructed with metal frames and have a highly customizable open-floor interior plan. Construction can be undertaken as a D-I-Y project; even kits are available for smaller barndos up to 1,000 square feet (93 square meters).
The cost of constructing a barndo (on a per-square-foot basis) can vary significantly depending on a few factors:
- Whether it was built on an existing structure or as a new build
- Whether it was completed as a DIY project or with the help of a builder-contractor
- Whether a kit was used or not
- The cost of interior elements, such as flooring, furnishing, decorations, and amenities
This significant cost variance adds to the difficulty of conducting a reliable appraisal.
Local banks and credit unions step in where the big boys fear to tread. They’re generally more receptive to loan applications for barndominiums but often set lower loan terms (usually up to 15 years) and higher down payments of up to 20%.
There are three types of barndo loans depending on whether you’re building or buying your unit. They come with varying loan terms, interest rates, and down payments. The loan types are:
A construction loan is a short-term lending facility – usually for a year or two – to finance the construction of your barndo. The loan amount is paid out in installments when certain milestones in the construction are reached and after the down payment is used up.
A construction loan typically comes with a higher interest rate than a mortgage. When the construction is completed, you must repay the loan in full or find another lender to refinance it as a mortgage. This means having to close the loan twice, incurring double closing charges.
This is a construction loan that is pre-approved for conversion to a mortgage upon completion of the construction. The advantage is that you need to close the loan only once. The mortgage loan term is usually 15 or 30 years, depending on the lender’s guidelines for barndo loans.
If you’re buying the barndo, you can apply for a long-term mortgage. Depending on the lender, the loan term will be 15 to 30 years, and the down payment can range from 0% to 20%.
The interest rate may be slightly higher than that for a traditional home mortgage. The loan amount may be lower because the land value is usually not factored in the valuation of the property.
Loans guaranteed by the U.S. Government are also available for barndominiums subject to certain conditions. If you meet the eligibility criteria for these loans, you can apply for them through approved banks and finance companies.
Government-backed loans include:
Home loans backed by the U.S. Department of Agriculture (USDA) come with no down payment, low-interest rates, and a usual term of up to 30 years.
However, USDA loans are available only in specified rural zones, so you’ll be eligible only if your barndo comes within those areas. In addition, household income limits apply as the loan is intended to assist low- and middle-income families with their housing needs.
Like USDA loans, Federal Housing Administration (FHA) loans are backed by the U.S. Government. FHA loans are meant for low- and medium-income families with poor credit scores who may otherwise find it difficult to secure loans. FHA loans have a down payment of around 3.5%.
I also recommend reading my full guide on FHA loans for barndominiums. You’ll learn about the appraisal process of an FHA loan for a barndo and how to apply for one.
If you’ve served or are serving in the military, you may be eligible for a Department of Veteran Affairs (VA)-backed loan to finance your barndominium. Even surviving spouses of military personnel can apply for VA home loans, which come with no down payments and a term of up to 30 years.
However, VA loans have steep appraisal requirements, mandating the property’s valuation against three comparable units in the region.
A government-backed loan is arguably your best option for barndo financing because of its not-too-stringent requirements, zero down payments, and low or competitive interest rates. However, not everyone qualifies for these loans.
If you don’t meet the eligibility criteria for Government loans, you’ve several other options. They include:
Local banks are an excellent place to start sourcing for barndominium financing. Sometimes, having a savings account in a small local bank will be enough to secure that home loan for your barndo.
However, loans from these banks typically come with a down payment of up to 20%, higher interest rates, and a lower term of 15 years.
Credit unions, especially farm credit unions, are another place where you stand a high chance of succeeding in securing financing for your dream barndo home. Farm credit unions have a long history of financing rural housing and farm equipment, and they may have unique loan programs that could suit your needs.
Some national banks are more receptive to barndominium loans than others, so you shouldn’t discount the big banks altogether. Banks that are receptive to barndo financing include:
- Wells Fargo: Well known for its new construction loans, Wells Fargo works with many builders who undergo a rigorous approval process. If your builder is approved by Wells Fargo, the better your chances of getting a loan.
- New Century Bank: This is one of the few banks actively promoting construction and mortgage loans for barndominiums and other unique-style housing.
Securing financing for your new barndominium may not be as easy as obtaining a mortgage for a traditional home, but there are enough lenders out there willing to shake hands with you on a loan deal. Consider your loan options carefully and choose the one that best meets your needs in terms of the loan amount, interest rate, and term.