The Challenge of Barndominium Loans and How to Get Financing
Barndominiums, homes created from converted barn structures, have grown enormously in popularity thanks to their rustic charm, flexible layouts, and cost-effective building approach. However, behind the idyllic appeal of a barndominium lies a harsh reality: they can be very difficult to finance. If you’re hoping to get a mortgage or construction loan for your barndominium dream home, here’s what you need to know about the financing challenges and how to overcome them.
Why Barndominium Loans Are Hard to Get
When you apply for a traditional mortgage, lenders scrutinize the property as collateral for the loan. With unique structures like barndominiums, most banks see higher risk and unknowns that deter them from lending. Some key reasons financing a barndominium is tricky include:
• Unconventional design – The barn style and agricultural purpose of the original structure falls outside lenders’ norms for home loans. Features like steel siding and pole-barn construction are flagged as unusual.
• Appraisal difficulties – Because there are few comparable barndominium sales, appraisers struggle to establish accurate property values, leaving lenders unsure if it sufficiently secures the debt.
• Resale market uncertainties – The niche appeal and scarcity of barndominium resales make lenders nervous about recouping funds if borrowers default. There’s limited data on barndominium resale demand.
• Custom construction – Since barndominiums feature so much customized craftsmanship (e.g. unique layouts, repurposed materials, cost-effective finishes), it diverges from lenders’ familiar housing data points and standardized building costs.
• Zoning and permit hiccups – Depending on location, permitting a non-standard residential structure or having adequate zoning for a barndominium’s intended use can require extra time and steps that drag out the lending process.
Tips to Improve Your Barndominium Loan Chances
While barndominium loans present more hurdles, it is possible to obtain financing if you strategize creatively and prepare meticulously. Tactics to boost lenders’ comfort with barndominium financing include:
Get clear on zoning/permit rules – Research relevant ordinances thoroughly so no issues crop up. Being well-versed in codes or requirements regarding residential outbuildings, barn conversions, and agricultural dwelling allowances shows the project is viable from the start.
Have detailed construction plans – Work with your builder or architect to produce plans that meet all technical specifications for residential buildings in your area – including essentials like electricity, HVAC, plumbing etc. This gives lenders confidence it will function fully as a home.
Seek an appraiser with barndominium expertise – Specialized appraisers who understand the market nuances of barndominium valuation and assessment standards can aid the financing process tremendously. Their experienced opinion carries much more weight with anxious lenders.
Focus on great design finishes – Use higher-end fixtures, features and building materials where feasible (e.g. granite countertops, top-of-the-line appliances). This makes the barndominium seem less unconventional to doubting lenders.
Adjust your loan-to-value ratio – Putting more money down by lowering your LTV tells lenders you’re sharing higher risk. This added “skin in the game” incentivizes them to finance more of the overall amount.
Common Barndominium Loan Requirements
If you do get approved for barndominium financing, expect lenders to layer on extra loan stipulations to mitigate their risks, like:
• Larger down payments – Lenders frequently require a 30-50% down payment on barndominium construction loans or mortgages, rather than the typical 15-20% required of conventional homes.
• Higher interest rates – Unconventional homes often means borrowers get stuck with interest rates up to 2% higher than comparable standard home loans.
• Shorter loan terms – Most barndominium loans cap terms at 20-25 years – notably less than the 30-year mortgages offered on traditional houses. You’ll pay the balance faster.
• Lower loan-to-value ratios – Banks are reluctant to finance more than 50-70% of a barndominium’s value. securing at least 30-50% of the funds from your own capital makes financing more feasible.
The unique nature of barndominiums can undoubtedly complicate the loan process & approvals and even determine the loans terms. But by strategic planning, smart design choices and compromising on cost factors, you can demonstrably reduce lenders’ risk concerns and convince them to help finance your dream barndominium home.
