A construction loan is a short-term loan that is used to finance the building of a new home, or in this case a barndominium. This loan is not like a traditional loan which is paid over a span of 15 to 30 years. A loan for constructing your barndominium will typically be paid out over the course of a single year or, in some cases, the length of the build.
If you do get a construction loan to build your new home then you will pay the interest on the loan but will not have to start paying back the principal until the construction is complete.
In many cases, a construction loan will turn into a conventional loan once construction is complete and it is refinanced by the lender.
- A construction loan has stricter eligibility requirements compared to other options, such as an FHA loan.
- You will have to pay more in interest for this loan than a conventional loan.
- You can delay payments until the construction of the house is complete, freeing up funds to help with moving or furnishings that the loan will not cover.
How Do Construction Loans Work?
The process to obtain a construction loan is similar to that of a conventional one but requires a lot more paperwork to get approval. You will have to provide documentation on your financials, plans and project timelines.
A barndominium contractor can handle getting all of this for you for a fee. They should even work with the lender to provide updates on the build and timeline.
If you’re applying for a construction loan the process will be close to this series of steps:
- You will search for a lender in your area or online.
- You will apply and submit all of the documents, outlined above, to the lender.
- If you are approved, the money will be dispersed based on the project timeline and phased plans provided to the lender. They will not give you all of the funds at once.
- You will continue to pay the interest on the loan while your new barndominium is being built.
- Throughout the build an inspector and/or appraiser will assess the build and approve the lender to release more funds as needed.
- As the build finishes it will convert from a construction loan into a permanent loan and you will begin repaying the principal and interest.
How are Construction Loans Different from a Traditional Loan?
The main differences between these two loan types are the cost and repayment timeline. A construction loan will typically be lower on the cost upfront and have a lower total balance and you’ll be required to repay the interest while building but defer the principal.
The other key differences are:
- Fund Management: You will not get a lump-sum payment for your build and instead will get chunks released in phases as work progresses.
- Delayed Principal Payment: You will repay only the interest until the home is built and then begin paying on principal and interest once construction is complete.
- Increased Inspections: During the build you will have multiple inspections by the lender to ensure things are moving forward and they will release funds based on this inspector’s findings.
- Variable Interest Rates: A traditional mortgage will have a fixed rate through the life of the loan whereas a construction loan will have variable rates until it is switched to a permanent loan.
- Higher Interest Rates: A construction loan is a lot riskier of an investment from the bank as there is no property they can take from you if you default on the loan causing you to pay more upfront to them.
Qualifying for a Construction Loan
A construction loan is a bit more strict when it comes to the eligibility requirements compared to other loan options.
Here are the main factors lenders will consider when determining your financial risk and approval odds:
Your credit score is one of the most important factors that lenders consider when deciding whether to approve your construction loan application. Having a good credit score can increase your chances of getting approved for a loan and can also help you secure a lower interest rate. Typically, lenders require a credit score of at least 680 to qualify for a construction loan.
Income and Debt-to-Income Ratio
Lenders will also look at your income to determine whether you can afford to make the loan payments. They will calculate your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward paying off debt. Ideally, your DTI should be below 43%.
Most lenders require a down payment of at least 20% of the total cost of the project. This means that if your barndominium will cost $200,000 to build, you will need to put down at least $40,000. However, some lenders may require a higher down payment, so it’s important to shop around and compare offers from different lenders.
Plans and Budget
To qualify for a construction loan, you will need to provide detailed plans and a budget for the project. This includes a list of materials, labor costs, and other expenses associated with building the barndominium. Lenders will use this information to determine whether the project is feasible and whether you can afford to repay the loan.
Choosing a Lender
When it comes to financing your barndominium construction, choosing the right lender is crucial.
Here are some factors to consider when selecting a lender:
1. Loan Products
Not all lenders offer the same loan products. Some may specialize in construction loans, while others may only offer land loans. Make sure to research lenders that offer construction loans specifically for barndominiums.
2. Interest Rates
Interest rates can vary greatly between lenders. You want to find a lender that offers competitive interest rates that fit your budget. Consider getting quotes from multiple lenders to compare rates.
In addition to interest rates, lenders may charge fees for their services. These can include application fees, appraisal fees, and closing costs. Make sure to ask about all potential fees upfront, so you can factor them into the total cost of your loan.
You want to work with a lender who has experience financing barndominium construction projects. Ask potential lenders about their experience with barndominium loans and if they have worked with other borrowers in your situation.
Do your research and read reviews from other borrowers who have worked with the lender you are considering. Look for lenders with a good reputation for customer service and transparency.
Frequently Asked Questions
What are the requirements for a USDA construction loan?
To qualify for a USDA construction loan, you must meet certain eligibility requirements. These include having a good credit score, a stable income, and a debt-to-income ratio of 41% or less. Additionally, your barndominium project must be located in a USDA-eligible area, and you must use the loan to build a primary residence.
Can I get a conventional loan for a barndominium?
Yes, you can get a conventional loan for a barndominium, but the process may be more challenging than getting a USDA construction loan. Conventional lenders may require a higher down payment, a better credit score, and more documentation.
Where can I find barndominium kits?
There are several companies that offer barndominium kits, including Morton Buildings, Worldwide Steel Buildings, and Texas Barndominiums. These kits typically include all the materials needed to build a basic barndominium structure, but you will need to hire a contractor to complete the construction.
What are some popular barndominium plans?
There are many different barndominium plans to choose from, ranging from simple one-bedroom designs to sprawling four-bedroom layouts. Some popular plans include the L-shaped barndominium, the two-story barndominium, and the open-concept barndominium.
Does New Century Bank offer loans for barndominiums?
Yes, New Century Bank offers loans for barndominiums. They specialize in construction loans and can provide financing for both the land and the building. However, their loan products may not be available in all states.
Are barndominiums eligible for Fannie Mae loans?
Barndominiums are not currently eligible for Fannie Mae loans, as they do not meet the organization’s minimum property standards. However, this may change in the future as more people become interested in this type of housing.