Builders regularly ask me if their customers can get financing for a barndominium construction project. The answer is yes. I am a nationwide barndominium construction lender who spends 100% of my workday providing customers with financing for the construction of the barndominium as well as for the permanent loan. I have been providing barndominium lending for many years.
In this article, I provide answers to frequently asked questions regarding barndominium construction lending. Many of these answers will vary depending on the lender you choose. I will provide important information from my experience as well as insights I have gained from competitive lenders. You can use these questions and answers as a guideline for communication with the lender of your choice.
What a Loan Can Include
What is allowed to be included in a barndominium construction loan? This is an important question to ask your lender. Will the lender allow the construction loan to include the purchase of land? How do they handle any existing land loans? Are “exterior” items allowed to be included in the construction loan, such as detached buildings, installation of driveways, septic systems, drilling water wells, pulling power to the property, fencing, ponds, etc.? Will the bank allow specialty items such as solar panels and in-floor radiant heating systems?
For my bank, the short answer is that the construction loan can include pretty much whatever it takes to get the customer’s property in the desired condition. This includes the complete build of the home and may also include the purchase of land, installing such things as a driveway, water well, septic system, pulling power to the property, solar panels, fencing, and pond.
Permissions and Requirements
What are the permissions and requirements? There are three permissions that I am most often asked about that are important to your customers:
1. Can I serve as the general contractor?
2. Can I live on-site?
3. Can I do any of the work myself?
I find it is not often lenders allow these three permissions, but some lenders will do so. With the exception of the state of Texas, some lenders may allow the customer to serve as general contractor, provided the customer confirms they have the skills and knowledge to do so. Many customers may want to live on-site during the construction period in a recreation vehicle.
As for doing any of the construction, many lenders require the complete building of the home to be done by professionals. A few lenders may allow the customer to do some work. For example, the bank may require all work up to and including the installation of interior walls (usually drywall) to be outsourced to professionals, but then allow the customer to do finish work such as painting walls, installing flooring, installing trim, and hanging fixtures and cabinets.
Factors Affecting Eligibility
What are the eligibility requirements? Keep in mind that construction loans involve more risk than a home purchase loan. With a construction loan, the home is a work in process. Once it is a single-family, owner-occupied home, however, the risk decreases significantly. As risk increases, eligibility requirements increase. Banks tend to look at four financial factors when determining eligibility and assessing risk:
1. Bank Balances. We often say that “cash is king.” Your customers will need to show sufficient funds to cover down payment and closing costs. It is helpful to have additional funds in checking, savings, and investment accounts, including retirement funds.
2. Down Payment. Banks will vary on the required down payment. I have seen as low as 15% for a barndominium construction loan. Some lenders will allow non-cash sources of down payment, such as equity in the land and equity in the current home, provided that your customer plans to sell the home prior to obtaining a permanent loan at the end of the construction period.
3. Credit Score. Lenders will vary on what they allow. I often hear a 700-credit score minimum for a construction loan.
4. Debt-to-Income Ratio. For construction loans, it is common to also consider the permanent loan requirements, i.e., the loan your customer has at the end of the construction period that includes both interest and principal as part of the loan payment. The most common source of permanent loans is through Fannie Mae.
I most often hear about a 43% debt-to-income requirement for construction loans. Simply take all monthly debt payments from all sources such as auto loans, instalment loans, credit card balances, student loans, alimony, child support, etc. and divide by the total monthly income from all sources. Some banks will exclude payments for the customer’s current home, provided they plan to sell the home prior to obtaining a permanent loan.
Common Components of a Loan
What are common components of a barndominium construction loan? For most lenders, it is common to have a construction loan period to build the barndominium, followed by a permanent loan. Construction loans are usually interest-only payments based on the average drawn balance for any given month. The loan amount is just an upper limit that cannot be exceeded. Many lenders will allow extensions, such as 90-day extensions at the end of the loan term for a minimal fee. Upon completion of the build, the goal for most customers is to get a permanent loan where the customer begins making principal and interest payments that may also include escrows for taxes and insurance. Permanent loan options vary among lenders.
Building Requirements and Restrictions
What are the building requirements/restrictions? Banks will vary on building requirements/restrictions. The key is marketability. It is common for lenders to require certain minimum ratios for finished living area compared to unfinished living area (shop and garage space). It is common to require at least 60% finished living area under one roof. You can count finished basements and finished second stories. Porches/porticos and any detached buildings are usually not considered in the ratio. It is also common for lenders to require the value of the home to be a certain percent of the value of the property. If the customer’s land is valued at $600,000 and you are building a $300,000 home, it will appear to be more of a land loan than a barndominium construction loan.
Information Needed Before Contacting a Lender
What should I have available before contacting a lender? It is helpful for your customers to have some land and build information ready prior to contacting a lender. For land, be prepared with the date acquired or to be acquired, the number of acres, the purchase price (if purchased within that last few years), estimated market value, and the loan balance, if any. For the build, you mainly need planned square feet by category: finished living area by floor, unfinished shop/garage/storage space, and covered porches space. The actual plans may change as your customer gathers cost information but, for the initial call with the lender, it is helpful to have approximate square foot numbers and a single number estimated/budgeted cost for the entire build, including both the home and all improvements to the property.
Conclusion
Barndominium construction lending is available nationwide. It is important to find a lender with barndominium construction experience. Your customers should be able to get competitive/similar loan terms to that of the more traditional stick-built homes. RB
Dave Navrat is a barndominium construction loan officer at First Federal Bank of Kansas City. Dave has been working with builders and families to coordinate barndo loans for many years and has helped facilitate numerous barndominium construction loans across the United States. First Federal (ffbkc.com) is a bank dedicated to helping people build a better financial future. We empower customers with financial literacy, personal and business banking accounts, and lending options.
