Building a barndominium is a considerable investment and requires a huge sum of money. One of the best ways to build one without draining your savings is by taking out a loan. You can avail many types of loans, one of which is the USDA Loan.
This guide will tell you what a USDA Loan is and how it can help you build your barndominium. We will inform you about the benefits of a USDA Loan and how you can use it to start building your dream barndominium. If however, you’re still not sure if this loan is right for you, we invite you to explore more available options covered in our barndominium financing guide.
Table of Contents
What is a USDA Loan?
A USDA loan is a special mortgage loan available to rural homeowners from the United States Department of Agriculture. It is also called the USDA Rural Development Guaranteed Housing Loan Program. The Single Family Housing Guaranteed Loan Program began in 1991 to help rural homeowners gain access to mortgage financing.
The USDA Loan offers financing assistance without needing a down payment for families belonging to the low and moderate-income brackets at a 3.75% interest rate. There is also the possibility of the Federal Government subsidizing the loan repayment based on the borrowers’ household income. A borrower can use the USDA Loan to buy an existing house or construct a new one.
Can You Build a Barndominium Using a USDA Loan?
Yes, you can build a barndominium using a USDA Loan. The USDA Loan is one of the most common loan types that barndo owners use to finance their construction. You need to meet specific qualifications if you plan on applying for this type of loan.
Your household’s income should be below the adjusted annual income of the state and county where you plan to build your barndominium. Remember that this refers not just to your income but also the income of all adult income-earners in your household. This is because the main thrust of the USDA Loan is to help homeowners belonging to very-low, low, and moderate-income households.
You must also be a US Citizen, a US non-citizen national, or a Qualified Alien. A US non-citizen national is a person born in an American territorial possession, like American Samoa or Swain’s Island, on or after the US acquired the possession. A person can also be a US non-citizen national if that person’s parents are US non-citizen nationals.
A US Qualified Alien is a non-citizen with lawful permanent residence, also called a “Green Card” holder. You can find a complete list of qualifications of a US Qualified Alien on this United States Department of Health and Human Services page.
Property Eligibility for Barndos
Aside from the qualifications listed above, your property also needs to be eligible for a USDA Loan. Make sure your barndominium meets these requirements to ensure a smooth application process.
- The property should be within a designated USDA rural area.
- You should agree that the barndominium you are building will serve as your primary residence.
- If you are purchasing a property, the property should not be a commercial investment or something that generates an income, like a farm or a rental home. However, you can purchase previously-income-generating properties that are no longer used for commercial purposes.
- The property should be reachable from a paved or all-season road surface, like concrete or asphalt.
- The barndominium should be durable and structurally sound.
- The barndominium should have a suitable roof.
- It needs to have fully operational HVAC systems.
- The barndominium should have a full-operational and safe electrical system.
- It should have a suitable plumbing system and adequate water flow for proper waste removal.
- To build a new barndominium, you need to hire a USDA-approved contractor.
Advantages and Disadvantages of Using a USDA Loan on Your Barndominium
Although there are many excellent reasons why you need to get a USDA Loan, there are also disadvantages to this type of loan. Knowing about them can help you decide if this loan type is ideal for you.
Advantages
No down payment
A USDA Loan offers 100% financing, which means that, unlike other loan types, the borrower does not need to make a down payment. On the other hand, it is typical for conventional loans to require a down payment of at least 3%. Some lenders even require a down payment of 20% if the borrower has limited income or a low credit score.
With the USDA Loan, you can start building your barndominium without dipping into your savings. It can also help you avoid getting loans from multiple companies because some borrowers end up borrowing the down payment needed for their conventional loan.
Low-interest rate
One of the things that make a USDA Loan more affordable compared to a Conventional Loan or FHA Loan is its low-interest rate. As of November 1, 2022, a USDA Loan’s interest rate was 3.25% for low-income and very low-income borrowers. Banks and lending companies can offer low-interest rates because of the guarantee provided by the USDA.
However, actual rates can still vary depending on the lending institution. Your credit profile and the current market conditions can also affect your mortgage rate.
Low monthly mortgage insurance
Private Mortgage Insurance is an additional cost that borrowers must shoulder, especially if they cannot cough up a 20% down payment. If you are getting a USDA Loan, you don’t have to obtain a PMI.
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However, a USDA loan has two fees: the first is an upfront guaranteed fee upon close on loan, and the other one is an annual fee. These fees get lumped into your monthly payment. The upfront fee is equal to 1% of the financed amount. The annual fee is equal to 0.35% of the loan’s current balance.
Flexible Credit Score requirements
The borrower’s credit score is the most significant stumbling block for those applying for a conventional loan. Most mortgage lenders require borrowers to have a credit score of at least 620. However, this is the minimum requirement. You need a credit score of 740 or higher to get the lowest interest rate possible.
USDA Loans don’t have a minimum credit score requirement. You need a credit score of at least 640 if you want to use the USDA’s automated underwriting system. If your credit score is lower than 640, you can still qualify using the USDA’s manual underwriting system. The USDA’s automated underwriting system is preferable because it shortens the loan processing time.
Disadvantages
Limited coverage area
Unlike other loan types, you can only build in areas deemed eligible by the USDA. Eligible areas are usually rural towns or cities with a population not exceeding 35,000. However, some areas with a population exceeding 35,000 might qualify if they are identified as low-income areas.
Since barndominiums are typically built in rural areas, this should be a minor concern for most barndo owners.
You cannot be your own contractor
You cannot go the DIY route if you plan on financing your barndominium with a USDA Loan. This is because one of the stipulations of the loan is that the structure gets built by a USDA-approved contractor. However, this doesn’t mean that you cannot do any work on your structure. You can do some work if you have handyman skills, but you must have a supervising USDA-approved contractor on site.
Consider whether a USDA Loan with a contractor or a DIY-build funded by a conventional loan will be more beneficial for you so you can decide which type of loan to get.
How to Apply for a USDA Loan for Your Barndominium
Find a USDA construction lender
The first thing to do if you are interested in a USDA Loan is to check if your bank or local lender offers it. You don’t apply directly to the USDA. Check this list of active lenders to see which local lenders offer a USDA Loan. The approved lender you choose will act as your point of contact throughout the loan process and answer any questions you have.
Choose your location
Your priority is to select a location that qualifies you for a USDA Loan because the USDA Loan aims to encourage people to move to rural areas. Check eligible areas near you and decide if you want to build a barndo in that location. It is important to note that rural areas don’t mean you need to move to a remote area. Some USDA-approved areas are in suburban locations or just outside of city centers.
Meet USDA property requirements
The property you wish to build on must meet some requirements to qualify for a loan. It should function as your primary residence and not be used for commercial or income-generating purposes. It needs to have a road, and the structure needs to have a functional HVAC system. You can use the Property Eligibility for Barndos section to see a comprehensive list of requirements.
Find a builder
You must hire a USDA-approved contractor to build your barndominium. Your chosen contractor will need approval from the USDA before commencing construction. Join our Facebook group and ask for recommendations on barndo builders in your area.
Meet income and credit score requirements
Meeting the credit score and income requirements of a USDA Loan is easier than meeting those of conventional loans. Ensure you have a minimum credit score of 640 and that your debt-to-income ratio is not more than 40%. Your household income should not be more than $103,500 per year, but this can change depending on the average annual income of your state.
USDA Loan Alternatives That Can Finance a Barndominium
Aside from USDA Loans, there are other loan types you can explore if you want to finance your barndominium. You can apply for these loans if your location is not eligible for a USDA Loan or your income makes you ineligible.
Just like the USDA Loan, an FHA Loan is government-backed. As its name suggests, this loan is backed by the Federal Housing Authority. An FHA Loan is an excellent option because of its low down payment, which can go as low as 3.5%. It is also accessible because of its lenient credit rating requirements. You can qualify for an FHA Loan even if you have previously suffered bankruptcy or foreclosures.
Another government-backed loan option is the VA Home Loan. However, the VA Loan is not for everybody. The only ones who can avail of a VA Loan are service members, veterans, and surviving spouses of veterans. Just like a USDA Loan, a VA Loan doesn’t require a down payment and has comparatively low-interest rates.
A Conventional Loan is another option you can try if you are not qualified for a USDA Loan. Unlike the USDA, FHA, and VA loans, this type of loan doesn’t have the backing of the Federal Government. The interest rates of conventional loans vary and will depend on your overall credit history and credit score.
Related Questions
What are the different types of USDA Loans?
There are two types of USDA Loans depending on the loan’s term length: a 15-year fixed-rate loan and a 30-year fixed-rate loan. Unlike other mortgage institutions, the USDA doesn’t offer adjustable-rate mortgages.
There are also two types of USDA Loans depending on the borrower’s intended use, a USDA Home Loan for purchasing an existing structure and a USDA Construction Loan. A USDA Construction Loan is a type of construction-to-permanent loan, meaning it covers the cost of constructing a barndominium and automatically converts it into a mortgage once you’re done building your structure.
What is the minimum credit score for a USDA Loan?
You need to have a minimum credit score of 640 to qualify for automatic approval via the USDA Guaranteed Underwriting System (GUS). This system automates the credit risk evaluation and can help shorten the application process.
Some lenders will accept applicants with a credit score lower than 640, but this requires undergoing manual underwriting, which can prolong the application and approval process.
How to know if an area is qualified for a USDA Loan?
If you are unsure if the area you want to build qualifies for a USDA Loan, use the USDA’s Eligibility Map. Just enter the address of the property you want to look up to see if it is eligible.
Summary
The USDA Loan is an excellent option if you need assistance financing your barndominium. It offers low-interest rates and does not require a down payment. You can qualify even with a bad credit history and low annual income. If you have a good credit score, the application process is automated to get results quickly so you can start building your barndominium immediately.
If you want to know more about barndominiums and if it is a type of home for you, read our Ultimate Barndominium Guide. We also invite you to like our Facebook page for more informative and inspirational articles and join our Facebook group with over 125,000 ready-to-help barndominium members, that reply in minutes.
