Purchasing a Barndominium with a USDA Home Loan
Not everyone using a USDA loan needs or wants a standard house, that single-family home with a white picket fence. There are many alternatives, including condos and manufactured homes, but for those looking to live in a rural area, barndominiums are an increasingly popular choice.
Wait! A barndominium? What’s that?
Barndominiums – also called “barndos” – can be barn-to-home conversions or built from the ground up. They're big structures appealing to rural buyers thanks to their wide-open layouts, high ceilings and large volume of flexible space.
As long as the barndominium falls within a USDA-eligible area, it is possible to do a one-time close USDA construction loan in order to build and finance a barndominium.
One of the biggest challenges of building or purchasing a barndominium is getting a loan for it. Lending requirements on home loans can be strict, and barndominiums are a specialty type of residential housing that not all lenders will approve.
Conventional loan lenders that do approve barndominiums may require a large down payment or a nearly perfect credit score. However, USDA loans are a handy alternative that helps you avoid the need for all that. USDA loans don’t require a down payment and have fairly lenient eligibility criteria. And the good news is that you can get a USDA loan for a barndominium as long as you meet the income limits and property requirements.
The property needs to meet a few basic requirements to get a USDA home loan approved.
Like any home loan, you must meet credit and income eligibility criteria.
Fortunately, the USDA does not set a minimum credit score requirement. However, most lenders will need a score of at least 640 to approve a loan. This is the minimum score needed to qualify for automatic approval through the USDA’s Guaranteed Underwriting System (GUS). A lower score is possible but will require manual underwriting.
To get approved for a USDA loan, you must have the ability to repay the loan. Lenders will look closely at current expenses and debts and see how they compare. For example, with the USDA loan program, your debt-to-income ratio or DTI should not exceed 41%. Your monthly housing expenses should be 29% or less. Higher ratios may be allowed if you have strong reserves, a solid credit score, a steady work history, etc.
Here’s a practical DTI example. The household has a gross monthly income before taxes of $9,000 a month, or $108,000 annually. Under the preferred USDA loan standards, as much as 29% of your income can be used for housing costs such as mortgage principal, mortgage interest, property taxes, and property insurance, a total of $2,610 in this case (29% x $9,000).
Also under the DTI standards, a borrower can devote as much as 41% of their gross monthly income to required debt payments. Think of housing costs (that $2,610 from above) plus auto loans, student debt, and credit card payments. In our example, 41% of $9,000 is $3,690 a month.
What if you’re above the 29/41 standards? Your loan application might still be approved if you have strong compensating factors such as good savings, a solid job history, or a higher credit score.
Because the program is designed to help those with low-to-moderate incomes, USDA loans also include income limits
These limits will vary by location and household size, but at this writing are typically:
You can either buy an existing barndominium or build an entirely new one with a USDA loan.
To build a new one, you must get a USDA construction loan. This can be a single-close loan. Instead of getting one mortgage to acquire the property and a second mortgage to add a home, with a single-close loan you get one loan that has two phases. First, it allows you to buy the property. Second, it pays for construction costs. Once construction is complete, the loan evolves into a fixed-rate USDA loan.
The best thing about a single-close construction-to-permanent loan is that there’s only one closing. This can mean no additional cost for a second title search, title insurance policy, settlement services, taxes, etc. Borrowers can save thousands of dollars if they do not face a second closing.
Barndominiums are increasingly popular these days, but like any specialist home type, they come with pros and cons. If a barndominium is right for you, get in touch with a USDA loan lender to look at your options in more detail.
| Barndominium Pros | Barndominium Cons |
|---|---|
| Can be cheaper and quicker to build than conventional houses. | Can be tough to find a lender who offers barndominium loans. |
| Require less maintenance due to the use of a durable steel frame. | Initial costs can be higher compared to buying an existing conventional home. |
| Offer an open-concept living space. | Barndominiums can be harder to sell |
| Unique in terms of features and character. | Metal exteriors can be noisy. |
Barndominiums offer a unique blend of affordability, durability, and customization. If you're considering building one, here are six key tips to help you through the process:
