A barndominium combines the rustic exterior of a barn with the amenities of a modern home inside. Barndos make great primary homes as well as vacation getaways and offer an affordable way to build a custom home. But financing the construction of these unique structures requires some special considerations when it comes to construction loans.
In this comprehensive guide, we’ll explain what a construction loan is, benefits and drawbacks, how construction loans work for barndominiums, qualification and documentation required, the step-by-step process, and top tips for securing financing to build your dream barndo.
What is a Construction Loan?
A construction loan is a short-term loan used to finance the building of a new home. With a construction loan:
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You work with a construction lender and builder to fund the home building phase
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The lender disburses payments to the builder at certain project milestones
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You only pay interest on the funds disbursed during the build
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Once the home is complete, the construction loan converts to a traditional mortgage
Construction loans allow you to customize and build your dream home before taking on a long-term mortgage And they provide access to financing for major projects that would be difficult to fund out-of-pocket
Benefits of Construction Loans
Construction loans offer home builders several key advantages:
One-time loan process – You go through one loan application process upfront rather than separate construction and mortgage loans. This saves significant time and paperwork.
Pay only the interest – You only pay interest on the construction funds disbursed to the builder so far, keeping payments affordable during the build.
Fixed interest rates – You can lock in a low, fixed rate upfront that will carry over to your eventual mortgage.
Customize plans – Construction loans allow for total customization compared to buying an existing home.
Stage payments – Builders get paid upon completing defined project milestones, preventing overpayment.
Drawbacks of Construction Loans
However, construction loans also come with a few disadvantages to consider:
More complex process – The loan involves extra paperwork, builder coordination, inspections, and draws.
Higher fees – Origination, processing, inspection, and other fees average 1-5% of the total cost.
Shorter terms – Construction terms are typically 6-18 months. Cost overruns can require extensions and delays.
More collateral – Construction loans often require the land plus extra collateral like another property.
Variable costs – Tricky to nail down exact total costs upfront before designing and building.
Specialized lenders – Not all lenders offer construction loans, so options are more limited.
How Construction Loans Work for Barndominiums
Construction loans for barndominiums work much like any home construction project. However, barndos have a few unique considerations:
Appraisal – Appraisers may need extra education on valuing metal barn homes if comparables don’t exist in your area.
Residential zoning – The land must be zoned residential rather than agricultural since barndos function as homes.
Custom plans – Construction plans may require an architectural engineer for the metal building portion.
Inspections – Inspectors will check the build at multiple stages to approve draw payments.
Interest-only – Your monthly payments only cover interest until the build is done and the mortgage kicks in.
Conversion – The construction loan seamlessly converts to a fixed-rate mortgage once the certificate of occupancy is issued.
Refinancing – You’ll likely want to refinance the mortgage after 1-2 years of homeownership into a lower rate.
Construction Loan Requirements and Qualification
To qualify for a barndominium construction loan, you’ll need to provide:
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A completed loan application with personal/financial details
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Proof of income and employment
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Credit history and minimum credit score (typically 620-650)
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Debt-to-income ratio typically below 43%
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Down payment, typically 25-30% of total costs
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Title insurance showing land ownership
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Appraisal of the land and construction plans
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Building plans, materials list, and estimated costs
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Builder’s credentials and portfolio
Providing thorough details upfront ensures you get approved for the necessary loan amount to successfully finance your build.
Step-by-Step Process for Getting a Construction Loan
Follow these steps when getting a construction loan for your barndo project:
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Find a reputable construction lender familiar with barndos.
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Get pre-qualified to confirm you meet eligibility requirements.
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Interview builders and get detailed building plans and cost estimates.
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Provide all required documentation to your lender.
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The lender will review the plans, budgets, and do an appraisal.
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Upon approval, you’ll close on the construction loan.
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Builder will break ground and request draws as they hit project milestones.
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Inspector verifies completion of milestones for each draw payment.
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Once the CO is issued, the construction loan converts to your mortgage.
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You’ll move into your new barndominium!
Tips for Securing Barndominium Construction Financing
Here are smart tips to get your barndo construction loan approved:
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Seek lenders experienced with barn home loans
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Highlight a large down payment of 30% or more
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Have excellent credit – scores above 700
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Get multiple bids to accurately estimate costs
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Add a contingency fund for cost overruns
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Use an established barndo builder with credentials
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Provide detailed construction plans and materials list
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Use a fixed-rate loan to lock in low rates
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Get pre-qualified to identify any issues upfront
Taking these steps will instill confidence in the lender that you can successfully finance and complete your barndo construction project.
Choosing the Best Construction Lender
Reputable lenders known for financing barndos and rural construction projects include:
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Smaller local and regional banks
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Farm credit unions – Especially for barn structures
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Online lenders like Lightstream and LendingTree
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Credit unions with experience in custom homes
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National lenders like Chase and Wells Fargo
Shop around and compare loan terms, rates, fees, and lender reviews. A knowledgeable lender familiar with barndos can smooth the financing process.
Alternative Financing Options
If construction lending criteria are too rigorous, consider these alternative barndominium financing options:
USDA loans – For low-income buyers in rural locations. Offers 100% financing.
Owner financing – Some sellers provide financing to qualified buyers directly.
Renovation loans – Finance updates and conversion for existing barns into homes.
Personal loans – May provide lump sum funds depending on project scope.
Home equity loan – Leverage your home’s equity for construction costs.
Seller carryback – Seller finances a portion of the purchase price directly.
The Bottom Line
Construction loans unlock the ability to fully customize and build your ideal barndominium home. But the process requires extra planning, strong finances, and an experienced lender. Understanding how construction loans work, finding the most reputable lender, and preparing accurate budgets sets you up for a smooth construction project resulting in your dream barn home.
Frequently Asked Questions
How much should I budget for construction loan fees?
Typical construction loan fees range from 1% to 5% of the total project costs. Budget for origination, processing, inspection, and other fees when estimating costs.
What credit score is needed for a construction loan?
Most construction lenders want to see a minimum credit score between 620 and 680. But the higher your score, the better your loan terms will be.
Do I need to own the land before getting a construction loan?
Yes, construction loans require that you own the land the home will be built on outright before closing on the loan.
Should I get quotes from multiple builders?
Yes, you should interview 3-4 builders and get multiple detailed quotes. This helps accurately estimate costs and find the best builder.
How much down payment is typical for a construction loan?
Most lenders want a 20-30% down payment for construction loans. Larger down payments give you better rates and approval odds.
Get the full value of your land
We value the equity in the acreage as well as any barns, outbuildings or site improvements so you qualify for the maximum loan amount.
Lower rates for less
If a lower rate becomes available after you close, you can reduce your rate for a small fee* without the hassle of refinancing.
While other lenders ask you to work with a builder they prefer, we let you choose your own. And our digital tool lets you manage your build in real-time with your contractor and Rural 1st team.
We like to make things easy for you. Other lenders may require you to take out a construction loan and then refinance into a regular mortgage, but Rural 1st can help you go from construction to a permanent loan with one simple package.