How To Finance a Barndominium (Getting a Mortgage)

A barndominium (or "barndo") is an excellent choice for a living space. It looks beautiful inside and out and is easier on the bank account than most residential buildings. Still, it'll take more than a handful of spare change to purchase a barndominium, which is why figuring out the right way to finance it might take some thorough planning on your part.

Here's how to finance a barndominium:

1. Research your local laws on barndominiums.
2. Draft a comprehensive building plan for your barndominium.
3. Find contractors or subcontractors specializing in barndominiums.
4. Get a property appraisal for your barndominium.
5. Consider a construction loan instead of a mortgage.
6. Assess (and boost) your creditworthiness.
7. Pick the best lender available.
8. Prepare for potential setbacks when obtaining a loan.

In this article, I’ll discuss every step you want to take before obtaining a barndominium loan to boost your chances of lenders approving your application. I'll also cover how to choose the best lender for you and touch on the problems you may encounter when trying to get financing for a barndominium.

1. Research Your Local Laws on barndominiums

Before drafting your barndominium's building plan, check your local laws first. Otherwise, you'll end up wasting too much money on your dream home, only to realize you have to remove or rebuild significant portions because they don't meet legal requirements. Some of the regulations you should know include zoning and building codes.

Zoning

Zoning laws dictate how the government wants to use a piece of land. For example, if you're going to build a barndominium in a specific area, you should check whether the zoning laws allow the construction of residential properties within that space.

Aside from the type of properties you can construct, zoning laws may also define the extent to which those properties can cover or use an area. They can specify the size of a specific building, what existing utilities they can use (if any), and whether you can keep pets, among many other regulations.

When researching zoning laws, make sure they apply to the land where you intend to build your barndominium. The land regulations used in one part of town may not apply to a different area. Consult your local government or an attorney who specializes in local zoning regulations if in doubt.

Building Codes

Keep in mind that zoning regulations differ from building codes. Zoning laws mainly cover the area and amenities surrounding a property. Meanwhile, building codes outline how you should construct your barndominium, what goes into it, and whether it complies with public health and safety regulations.

If you're using an old barn as the base for your barndominium, make sure the old building complies with existing codes. For example, the previous owners may have used paint that violated the Environmental Protection Agency's (EPA) hazard standards and clearance levels for lead. In that case, you'll have to factor a new paint job into your barndominium building plan.

To show compliance with local building codes, you need to obtain a permit before building your barndominium. Building permits can cost $150 to $7,500 depending on where you live, according to Home Advisor. Be sure to account for the cost of permits when calculating how much you'll spend on a barndominium, lest you run into unwanted and expensive legal problems.

2. Draft a Comprehensive Building Plan for Your Barndominium

Now that you know what you can legally do with your barndominium, you can draft a building plan that complies with government regulations, matches your vision of your dream home, and makes your project more appealing to potential lenders. Some things to consider when you plan and price a barndominium include the following:

Land Value

If you're building a barndominium on farmland, you may have to shell out around $3,160 per acre, according to the USDA's 2020 land values summary. The value may be higher or lower depending on the barndominium's location. For instance, a barndominium in a metropolitan area will cost more than its rural counterpart.

Cost of Barndominium Kits

Whether you're constructing your barndominium from scratch or not, a barndominium kit can save you plenty of time and effort. These kits can cost between $10 and $50 per square foot per Home Advisor's 2021 data on metal house kit prices. The least expensive ones cover 1,000 square feet, amounting to a minimum cost of $10,000 per kit.

However, "you get what you pay for" also applies to barndominium kits. For example, the most basic plan may only cover the frames. In that case, you're better off building on an existing structure since you'll have a bit more than just frames to work within this scenario.

Barndominium Foundation

If you're using an old barn as a foundation for your barndominium, you'll have to make it more livable for human inhabitants. For example, you may need to put an additional layer of concrete over the floors where animal waste has been accumulated over the years. You may also want to look into anything else that may compromise the structural integrity of the barndominium, like cracks in the supporting beams.

Insulation of Your Barndominium

Barndominiums typically have metal structures. If you've ever touched a burning stove, you know metals are great conductors of heat. On the other hand, metals are also poor insulators, meaning they don't offer much protection against cold weather.

Therefore, barndominiums require additional insulation to make them more livable. One decent insulation material for a barndominium is spray foam. You can use it to fill wall crevices, reducing the accumulation of moisture and protecting the building's metal structures from corrosion.

Utilities

When constructing a barndominium, you need to account for essentials like plumbing, HVAC, and electrical systems. Assuming you did your homework regarding your area's zoning laws, connecting utilities to your barndominium shouldn't be too difficult.

If there's one thing you shouldn't DIY, it's utilities. You need help from licensed professionals to ensure your barndominium receives an ample supply of water and electricity. The fact that third parties will be billing you for these services, makes professional assistance even more essential.

Other Amenities

Depending on local zoning regulations and building codes, you may be able to install additional structures like extra rooms, swimming pools, patios, etc. As long as you properly plan beforehand, the sky’s the limit. These will bump up your costs, of course, but if they make your barndominium feel more like home, why hold back?

Personal Touch

Your barndominium shouldn’t feel like a bunch of cold metal frames and structures. It's your barndominium, meaning you have the freedom to design and personalize it as much as you want. You can furnish your interiors with quirky wall paintings, warm rugs, plants, and other items that define your house's "personality." Again, these should factor into your calculations regarding the cost of your barndominium.

Online Building Plan Generators

If you only have a vague idea of what your dream barndominium will be, or you need a little more help visualizing what the final result will look like, you can always use a home design software.

A great example is Live Home 3D. You don't need an architecture degree to use it. With a few clicks or swipes of your device, you can create floor plans and 3D renderings in a matter of minutes. Additionally, unlike most free online home design software, they have a US office, so you can contact them for technical support if necessary.

3. Find Contractors or Subcontractors Specializing in barndominiums

At this point, you should have a detailed plan for building your barndominium. Even if you plan to DIY your way through your project, it won't hurt to seek professional advice. After all, this is probably the first time you've worked on a barndominium, whereas contractors and subcontractors have been doing it for years.

Additionally, you have to account for the labor cost when building a barndominium. According to one source, contractor costs can set you back by $30,000 to $60,000. That's why it's crucial to pick the most suitable barndominium construction company for you, as follows:

• Look up the barndominium directory for your area. Search for "best barndominium builders" + (insert your location here) online, and give the results a quick scan. Visit the websites of the companies that seem legitimate or decent.
• Look up reviews for prospective contractors. Look up the name of the contractor plus reviews. You can also check out forums where people are likely to give honest feedback on contractors they've used in the past.
• Check the contractor's portfolio. barndominium contractors should have listings and photos of their projects. Check out their portfolios, and see if they have anything that matches or looks anything like your dream home.
• Contact three to five contractors. Note three to five companies that seem promising, and contact them via phone or email. Give them a quick overview of your plan, ask them for quotes and whether they can handle the project.
• Interview prospective contractors. Don't just choose your contractor based on the cheapest option. If they give you a final price, ask them what went into their calculations. Inquire about more cost-effective options and the pros and cons of each. Remember to get approximate timelines, materials needed, and the like.

Once a solid contractor or subcontractor has your back, it should be easier to find a willing lender. Most lenders may feel apprehensive about borrowers who take a 100% DIY approach on their building projects since the risk that something will go wrong is higher.

On the other hand, a borrower backed by a reputable construction company can boost their chances of getting the money needed to see their project through.

4. Get a Property Appraisal for Your barndominium

You have your detailed building plans, your contractor or subcontractor, you know what you need and how long the project will take. Now that you have all of the above, you can get a professional to appraise your barndominium's value.

Note that the market value of your barndominium may not necessarily equal the cost of your project. That's because a barndominium's market value also accounts for factors beyond your control, such as the prices of surrounding properties, interest rates, and the current employment rate.

Additionally, lenders are more interested in your barndominium's market value than the cost of building it. If you're asking them for a mortgage to finance your project, your barndominium will likely serve as collateral in exchange. In other words, if you're unable to pay off your loan as agreed, the lenders can seize your barndominium to compensate for the remainder of your debt.

There are two ways you can get a property appraisal. You can hire an independent professional yourself, or your lender may do it for you to avoid "bias." Either way, if you want to make the most of an appraisal for your barndominium, here's what you can do.

• Account for everything that can bump up your barndominium's value. Anything that shows you've done your best to keep the barndominium in great shape — like upgrades and renovations — should have supporting documentation for the appraiser's review.
• Research prices for similar nearby properties. If you have neighbors who also own barndominiums, look up the value of their homes on sites like Zillow. You can also use Zillow to buy, sell, or rent houses if you ever need to do that. If you're the only barndominium in your area, that's fine: the average property prices in your area will do too.
• Prepare to challenge the appraiser's assessment, if necessary. Appraisers are human too. They may know how to assess property values based on specific methods, but since they're not as knowledgeable about your property as you are, they may have overlooked something. If you think the appraiser's valuation is off in any way, don't hesitate to raise a dispute.

Once you have an appraisal value you're satisfied with, make a record of that and its supporting documentation and keep it in a safe place. Don't forget to do the same with your original building plan and related paperwork. Armed with this information, you're now ready to find a lender.

5. Consider a Construction Loan Instead of a Mortgage

You may be wondering why I didn't directly address money matters until halfway through this article. That's because lenders want to see two things: (1) You know what you're doing when planning your barndominium, and (2) You have the financial capacity or willingness to pay them back in full and on time. I've already thoroughly addressed Point # 1, so let's get to Point # 2

Many would-be barndominium owners take out construction loans to finance their projects. As their name implies, these loans ease the financial burden that you'd otherwise take for costly construction work. Construction loans usually have the following characteristics.

• Issuance of certificate of occupancy. You need to provide proof that, once construction ends, you will reside in the barndominium permanently.
• One-year duration. A construction loan is a good idea when you expect to finish your barndominium within a year or so.
• High interest rates relative to traditional mortgages. Unlike a conventional mortgage, a construction loan doesn't require you to provide your house as collateral. Because a lender takes on a higher risk when giving out a construction loan, they impose a higher interest rate to mitigate the added risk.
• Convertibility. Some construction loans allow you to convert them to permanent loans — that is, your construction loan becomes a traditional mortgage. You can also take out a loan specifically for renovations known as a "home renovation loan."
• Extendability. What if the loan period ends and you still haven't completed the barndominium? In that case, you have to take out another loan.

Alternatively, you can take out a traditional mortgage, which should take around 15 to 30 years to pay off. However, mortgage lenders may have more stringent requirements than those who give out construction loans. Additionally, you may have to negotiate a payment structure that makes sense given the lender's needs and those of your project.

6. Assess (and Boost) Your Creditworthiness

Your barndominium may look good on paper, but if the lender has any reason to believe you can't pay off your loan, you may have to look elsewhere for financing options. If you want to convince a lender that you're not a high-risk borrower, you need a decent credit score.

What's a "decent" credit score, you ask? According to Experian, a good credit score falls between 670 and 739. And under the VantageScore system, your rating should be between 661 and 780. You can check your free credit report through AnnualCreditReport.com.

If your credit score is good, you can skip to the next section. Otherwise, here are tips to "fix" your FICO score as quickly as possible.

• Double-check your credit reports for errors. It's possible that any of the Big Three credit reporting agencies — Experian, Equifax, and TransUnion — made a mistake with your report. If you see anything off, like flagging a loan as "outstanding" when it's already paid in full, file a dispute letter with the agency that made the mistake.
• Pay off as much of your current debts as you can. Start with the debts you can afford to pay in full, like outstanding utility and credit card bills.
• Avoid taking on new debt (other than the one for the barndominium). If lenders see that you're taking on more debt than you can afford, they won't be too keen on giving you the financing you need.

Lenders may approve your loan application if you demonstrate that you have a history of settling debts in good faith. Otherwise, you'll have to provide a more convincing explanation as to why lenders should ignore your history and look at your future ability to pay in full and on time instead.

7. Pick the Best Lender Available

Owning a barndominium is a dream come true for many people. It offers the perfect combination of low cost and high quality. However, before you get too excited about this amazing opportunity, it's important to understand what it will take to get a mortgage for your very own barndominium. In this section, we will outline some important factors to keep in mind so that you can better understand the process of getting a mortgage for a barndominium.

The process of getting a mortgage for a barndominium

Getting a mortgage for a barndominium is not as difficult as one might think. There are a few key steps that need to be taken in order to get the best mortgage deal possible.

The first step is to get pre-qualified for a loan. This can be done by contacting a variety of lenders and getting quotes from each one. Once you have been pre-qualified, you will then need to find a lender who is willing to give you a loan for your barndominium.

The next step is to get pre-approved for the loan. This can be done by providing the lender with all of the necessary documentation, such as your credit score, income, and assets.

The final step is to close on the loan. This can be done by signing the loan documents and making any necessary down payments. Once you have closed on the loan, you will then be able to move into your new barndominium and begin enjoying all of the benefits that come with owning your own home.

Factors to keep in mind when applying for a mortgage

When applying for a mortgage, there are a few important factors to keep in mind. Below are four of the most important ones:

1. Your credit score

Your credit score is one of the most important factors when applying for a mortgage. A high credit score will help you get a low interest rate, while a low credit score will lead to a higher interest rate. It's important to make sure that your credit score is as high as possible before applying for a mortgage.

2. Your income

Your income is another important factor when applying for a mortgage. Lenders will want to make sure that you can afford the monthly payments, so they will look at your income and compare it to your monthly expenses. If your income is too low, you may not be able to qualify for a mortgage.

3. Your assets

Your assets are also important when applying for a mortgage. Lenders will want to see that you have enough money saved up for a down payment and closing costs. If you don't have enough assets, you may still be able to qualify for a loan, but you'll likely have to pay a higher interest rate.

4. Your employment history

Your employment history is another important factor when applying for a mortgage. Lenders will want to see that you have been employed for a certain amount of time and that you have a steady income. If you have been unemployed for a long period of time or if your income is unstable, you may not be able to qualify for a loan.

These are just a few of the important factors to keep in mind when applying for a mortgage for a barndominium.

Where to get a Mortgage for a Barndominium

There are a variety of places where you can get a mortgage for a barndominium. The most obvious place to start is with your local bank or credit union. They will be able to offer you a variety of different loan options, and they may be more willing to work with you if you already have a relationship with them.

If your bank or credit union doesn't offer mortgages for barndominiums, you can try contacting a mortgage broker. A mortgage broker will be able to help you find the best deal on a mortgage, and they may have access to lenders who don't normally offer loans to the general public.

No matter where you end up getting your mortgage from, it's important to shop around and compare offers from multiple lenders before making a decision. This will help you ensure that you're getting the best deal possible on your loan.

8. Prepare for Potential Setbacks When Obtaining a Loan

Of course, the process of financing your barndominium project won't always be smooth sailing. After all, construction will take at least a year, and anything can happen within that period. Some of the problems you may want to prepare for include:

• Running out of money in the middle of construction. Suppose you had an unforeseen event (e.g., an accident) that forced you to take out cash from your barndominium construction fund. In that case, you may have to talk to your lender about adjusting your loan terms.
• Rising interest rates. When investors expect the economy to go well, they raise interest rates. Increasing interest rates bode well for the economy but not for your ability to keep up with loan payments.
• Additional unforeseen construction costs. Maybe it'll take longer than anticipated to make your barndominium livable. If you need a substantial amount of money to cover those extra costs, you may have to borrow more.

To be safe, you may want to set aside an emergency fund for your barndominium construction project. That way, even if something goes wrong, you'll be prepared for it.

Conclusion

Before financing your barndominium, ensure you have a detailed plan in place. Try to cover all possible bases and prepare for any potential hiccups along the way. Show potential lenders that you've thought the whole thing through and won't have any problems paying them back according to your agreement.