Can you build a barndominium with an FHA loan?

Barndomiums have been among the hottest housing trends for several years. Their open-style floor plans, customizable interiors, and lower cost per square foot are just a few of the reasons for their desirability.

These rustic homes can either be created from a renovated existing barn or built from scratch. If you’re interested in building your own, you might be wondering if you could finance the project with an FHA loan. The short answer is yes, but you and the property must meet certain conditions. Read on to learn more about what to expect.

What is a barndominium?

A barndomium is a barn-style structure with an open floor plan that prioritizes customization and affordability. They can be built with a steel frame, wood frame, or hybrid frame.

Barndomiums have become increasingly popular in recent years, particularly in rural areas, due to their unique benefits. For example, they tend to have lower labor costs and more space for workshops compared to other types of dwellings.

A review of how FHA loans work

An FHA loan is a mortgage backed by the Federal Housing Administration (FHA). Private lenders issue them, but the FHA guarantees the loan if the borrower defaults.

As a result, participating FHA loan lenders can offer better loan terms, especially for first-time home buyers who may need extra help to begin their homeownership journey.

• Low down payment requirement: You can put down as little as 3.5%, and the money can come from friends or family.
• Lenient credit requirements: You can qualify with a credit score as low as 580 (or 500 if you put down 10%). Rocket Mortgage^® requires a minimum credit score of 580 for FHA loans.
• Potential to finance closing costs: Some FHA loan lenders may allow you to roll your closing costs into the loan.
• Competitive interest rates: FHA loan interest rates are often slightly lower than conventional loan rates.

Using an FHA loan to buy a barndominium

That said, FHA loans can’t finance any property. The FHA has a minimum property standards checklist.

• Be owner-occupied. In other words, you must live in the home. It can’t be a vacation or investment property.
• Have a permanent foundation. The foundation must meet the standards of the Department of Housing and Urban Development (HUD).
• Be located within residential zoning. FHA loans can’t finance commercial properties.  
• Provide safe and habitable living conditions. The property must be safe, secure, and structurally sound, as determined by an FHA-approved appraiser.
• Have adequate roofing. The roof must have a remaining physical life of at least two years. 

Building a barndominium with an FHA construction loan

If you prefer to build a barndomium, FHA also offers an FHA construction loan.

In this case, a participating lender disburses loan funds in stages as construction progresses, and the FHA oversees the project to ensure it meets quality and safety standards. Meanwhile, the borrower usually makes interest-only payments.

Once the barndomium is complete, the construction loan is converted into a long-term mortgage, and the borrower starts paying down interest and principal.

To qualify for an FHA construction loan, you must use an FHA-approved builder, and construction must pass inspections along the way. This can limit your building options and delay how soon you can move into your barndominium.

FHA loan options for barndominiums

FHA construction loans come in two forms: FHA 203(k) loans and FHA one-time close construction loans.

FHA 203(k) loan

An FHA 203(k) loan is designed to finance the purchase and renovation of an existing property. Minor repairs may be eligible for a Limited 203(k) loan, while major repairs may require a Standard 203(k) loan.

For example, if you find an existing barn, you could potentially finance its conversion into a barndominium with a Standard FHA 203(k) loan.

To qualify for this type of loan, you must:

• Obtain all building permits before commencement of work.
• Hire an FHA-approved 203(k) consultant.
• Meet standard FHA loan requirements.

FHA one-time close construction loan

An FHA one-time close construction loan is two loans in one: a short-term construction loan and a traditional long-term mortgage. It can finance the construction of a barndomium from the ground up and provide permanent financing once it’s complete. That way, you don’t have to pay closing costs for two separate loans.

To get this type of loan, you must hire an FHA-approved builder. They must have:

• Needed licensure
• Liability insurance
• A minimum of 2 years of experience building homes

Pros and cons of using an FHA loan for a barndominium

Before using an FHA loan to finance a barndomium, carefully weigh the pros and cons:

Pros

• Low down payments: FHA loan down payments can be as low as 3.5%.
• Flexible credit score requirements: Your credit score can be as low as 580 (or 500 if you put down 10%). Rocket Mortgage® requires a minimum credit score of 580 for FHA loans.
• Government backing: Since the FHA insures the loan against default, lenders can offer better terms to borrowers who might not meet conventional loan terms.
• Options for renovation financing: With an FHA 203(k) loan, you can finance renovation costs on top of the property purchase.

Cons

• Strict appraisal process: FHA loans are government home loans and require an FHA-approved appraiser, which can limit your appraisal options.
• Must meet strict building codes: The property must be safe, secure, and structurally sound as determined by an FHA-approved appraiser.
• Limited lender participation: Not all lenders offer FHA loans, which could limit your borrowing options.
• More paperwork and inspections: FHA loans require you to submit a mortgage credit analysis worksheet, pay stubs, W-2 or 1099 forms, tax returns, and a copy of your social security card. Plus, the property must pass an inspection.
• Mortgage insurance premiums: Borrowers must pay an upfront mortgage insurance premium of 1.75% of the loan amount and an ongoing MIP of 0.15% to 0.75%. However, this fee expires after 11 years if you put down at least 10%.

Tips for financing a barndominium with an FHA loan

Here are our top tips for financing a barndomium with an FHA loan:

Work with a lender experienced in barndominium loans

A lender with experience financing barndomiums can offer tailored guidance you can’t get elsewhere. To find one, research lenders online, check their reviews, and ask if they’ve financed barndomiums before. You may also want to compare FHA loan rates before choosing a mortgage lender.

Get prequalified

FHA loan prequalification is a conditional loan offer. You can get prequalified by sharing a few details about the property and your personal finances with your lender. That way, you get a better idea of your purchase budget, and sellers will take you more seriously.

Hire an FHA-approved builder

If you decide to buy land and build a house or barndominium there, FHA construction loans require you to use an FHA-approved builder. While this can limit your building options, it also ensures your builder is qualified.

To find an FHA-approved builder, research local construction companies and check that they meet FHA’s standards. Also, check that they build barndomiums. Some builders only offer premade floor plans, while others offer customized homes.

Secure land with proper zoning first

Before building a barndominium, you will need to check that the structure meets local zoning laws and building codes. They regulate what types of structures are allowed in the area and how they must be built. If barndomiums aren’t allowed, look elsewhere for a property to build on.

Alternative financing if FHA loans don’t work

For other ways to finance a barndominium, consider the following:

• U.S. Department of Agriculture (USDA) construction loans: These are single-close construction loans backed by the USDA for properties in rural areas. Unlike most loans, they don’t require a down payment.
• VA construction loans: These are single- or double-close construction loans for active-duty service members, veterans, and their surviving spouses. They don’t require a down payment or private mortgage insurance (PMI).
• Conventional loans: These are mortgages not guaranteed by the government. As a result, they tend to have stricter loan requirements.

FAQs

Here are answers to frequently asked questions regarding building a barndominium with an FHA loan:

Can I buy land and build a barndominium with an FHA loan?

Yes, you can buy land and build a barndomium with an FHA construction loan if you meet the loan requirements.

Do barndominiums qualify for home insurance?

Yes, but you may need specialized home insurance, especially if the barndominum serves as a home and a workshop.

How long does it take to get FHA construction financing?

It can take as long as 60 days, depending on the lender, property, and borrower profile.

Can I use an FHA loan to convert a barn into a home?

Yes, if you and the property meet FHA 203(k) loan requirements.

The bottom line: Financing a barndominium with an FHA loan is possible

Financing a barndominum with an FHA loan is possible, whether you’re purchasing an existing property or building one from the ground up.

While FHA loans may involve stricter loan and property standards, they also offer benefits like low down payment and credit requirements. With the right preparation, you can turn your barndominium dream into reality.

If you’re ready to explore your options, connect with a Rocket Mortgage® Home Loan Expert today.