Outbuildings & Home Loans — What Realtors Need to Know

A detached garage, barn, shop, stable, shed, or other outbuilding can be a great selling feature—but it can also create a financing issue depending on the loan program, property use, and appraisal.

As a realtor, the key is identifying potential problems before your buyer gets too far into the transaction.

What to know

1. Outbuildings aren't automatically a problem. Many properties with garages, shops, barns, sheds, and similar structures can qualify for financing.

2. Size and use matter. A small storage shed is very different from a large barn, livestock facility, commercial shop, or agricultural building.

3. Conventional loans focus heavily on whether the property is residential in nature. Large or unusual outbuildings can raise questions about whether the property is primarily residential or agricultural.

4. FHA relies heavily on the appraisal. The appraiser considers the property, improvements, marketability, comparable sales, and applicable property standards.

5. VA can allow detached buildings and agricultural-type improvements. Their value must be based on what they contribute to the property's residential market value.

6. USDA can be more restrictive when outbuildings are used to generate income. Buildings primarily used for agricultural, farming, or commercial income-producing purposes can create eligibility problems.

7. When in doubt, ask the lender before writing the offer. A quick review of unusual outbuildings can potentially prevent appraisal, underwriting, and closing problems later.

Why Realtors Should Pay Attention to Outbuildings

Outbuildings can include detached garages, storage sheds, workshops, barns, stables, equipment buildings, pool houses, recreational structures, and other improvements separate from the primary residence.

Most aren't automatically financing problems.

The questions are usually: What is the building used for? How significant is it compared with the house? Is the overall property still residential in nature? Is the structure typical for the area? And can comparable residential sales support the property and improvements?

Those questions can become especially important with rural properties, acreage, hobby farms, horse properties, and homes with large shops or barns.

1. Outbuildings Aren't Automatically a Problem

Don't assume that seeing a barn, shop, stable, or large detached garage means your buyer can't obtain traditional residential financing.

Many properties with outbuildings are perfectly financeable.

The issue is generally how the structure affects the property's residential character, marketability, use, and value.

A small shed may receive virtually no attention. A huge commercial-style shop or agricultural facility can require considerably more analysis.

2. Size and Use Matter

When showing a property with substantial outbuildings, find out how they're being used.

A detached garage used for personal vehicles is different from a building being operated as a commercial repair shop.

Likewise, an old barn being used for personal storage can be viewed differently from facilities actively supporting an income-producing farming operation.

The bigger and more specialized the improvements become, the more important it is to discuss the property with the buyer's lender early.

3. Conventional Loans — Is It Still a Residential Property?

For conventional financing, outbuildings can generally fall into several categories.

Small barns, stables, or similar improvements that represent an insignificant portion of the property's total value may be acceptable when the appraisal demonstrates that these types of improvements are typical for residential properties in that market.

An atypical but relatively insignificant outbuilding may also be acceptable when the appraiser assigns little or no contributory value to it.

Large barns, silos, animal facilities, extensive storage structures, or other significant improvements deserve more attention because they can suggest agricultural rather than residential use.

Ultimately, the lender needs to be comfortable that the property remains residential in nature.

4. FHA — Expect the Appraiser to Take a Close Look

FHA does not provide extensive outbuilding-specific guidance, so the appraisal becomes particularly important.

The appraiser will consider whether the property complies with applicable FHA property requirements and whether comparable sales adequately support improvements that contribute value.

For an unusual property with substantial outbuildings, talk with the lender before your buyer commits whenever possible.

Different lenders can also have their own underwriting interpretations or overlays.

5. VA — Outbuildings Can Be Acceptable

VA financing can accommodate various detached structures.

A shed, detached building, or similar structure that cannot legally function as a separate dwelling may generally be considered storage or another accessory use.

Barns, corrals, stables, and similar improvements may also be considered, but the appraiser evaluates their contribution to the property's residential market value.

Livestock, crops, farm equipment, and other personal or agricultural property aren't included as part of the real estate value.

6. USDA — Watch for Income-Producing Use

This is an especially important issue with USDA financing.

The property generally cannot include buildings principally used for income-producing purposes.

That doesn't necessarily mean an old barn, silo, greenhouse, livestock building, or workshop automatically kills the deal.

Structures that are no longer part of a commercial operation and are instead being used for personal storage or other non-commercial purposes may be acceptable. Storage sheds and non-commercial workshops can also be permitted.

The distinction is often personal residential use versus income-producing agricultural or commercial use.

7. Call the Loan Officer Before Writing the Offer

This is the simplest takeaway for realtors.

If you're showing your buyer a property with a huge shop, barn, stable, agricultural building, multiple detached structures, extensive acreage, or anything else that makes the property unusual, send the information to the loan officer before writing the offer whenever possible.

Photos, the MLS listing, property description, acreage, and information about how the buildings are currently being used can help identify potential concerns.

It's much easier to investigate an unusual property before the buyer is under contract than to discover a financing problem after the appraisal has been completed.

The Bottom Line for Realtors

Outbuildings don't necessarily prevent conventional, FHA, VA, or USDA financing.

What matters is the type of structure, size, use, value, marketability, comparable sales, and whether the overall property remains residential in nature.

When you're dealing with acreage, barns, shops, horse facilities, or other unusual improvements, involve an experienced loan officer early.

See something unusual? Send it to me before your buyer writes the offer.

A five-minute conversation upfront may save you and your client from a much bigger problem later.