Environmentally friendly, affordable, and undeniably cute — yes, I’m talking about tiny homes.
Tiny homes have been around for a while now, but there’s been a surge in interest over the last few years.
The main reason? Affordability.
But although tiny homes can cost as little as $8,000, the average model sells for about $45,000, which is still a considerable amount.
If you’re like me, you probably don’t have that kind of cash just lying around, so financing is the way to go (sad, I know). However, this is easier said than done.
Since tiny homes are built quite differently from your typical residence, you’ll need to put some elbow grease to get the funds.
Can you get a mortgage on a tiny house?
While it is technically possible to get a tiny house mortgage, finding a lender that’s willing to do so can be challenging. That’s probably why 68% of tiny homeowners don’t have a mortgage on their property, compared to 29.3% of standard homeowners.
But why are mortgage lenders so wary of financing tiny homes?
Well, it turns out that two of the best attributes of tiny homes, which are their low cost and uniqueness, are also their biggest obstacle to being “mortgage-worthy.”
According to Experian, mortgage lenders typically don’t issue loans under $60K, and, since many tiny homes are way under that price point, it’s not profitable enough for lenders to take on that task.
Todd Nelson, senior vice president of Strategic Partnerships at LightStream (AFF), an online lender, says that another reason why mortgage lenders shy away from tiny home financing is that most of them “are used to lending on traditional single-family homes or condos that conform to their underwriting guidelines.”
“Tiny homes are different by nature. Sometimes they are park models that are meant to stay in place with a foundation, sometimes they’re wheeled vehicles, so they just don’t conform to the way mortgage lenders think about properties.”
These factors combined also affect the potential “securitization” of these loans (aka the lender’s ability to resell them as securities to investors), which is often the final nail in the coffin for tiny homes in the eyes of mortgage lenders.
Hurdles to overcome if you want a mortgage for your tiny home
If you’re dead set on getting a mortgage for your tiny home, you’ll have to jump through several hoops to increase your chances of accomplishing your mission. Here’s what to know about each one.
1. Price point
As I mentioned before, mortgage lenders typically don’t issue mortgages under $60,000 because they aren’t profitable enough in terms of fees and how much they’ll earn on interest.
But, while there are plenty of tiny homes that will cost you $45,000 and under, there are also more luxurious models with price tags that exceed the $100,000-mark.
Choosing one of these models can potentially increase your chances of finding a lender that’s willing to work with you. However, if you’re into the tiny living movement just to save money on the house’s price tag, this may be counterproductive.
2. Your community’s zoning laws
In a nutshell, zoning laws regulate how land is used and developed in a certain area or community. Zoning laws also dictate the minimum square footage or size that a property must have for it to be placed on a certain plot of land.
For a mortgage lender to approve you for the loan, your tiny house must be in compliance with your intended neighborhood’s zoning laws.
One of the perks of owning a tiny home is that many models are built with wheels, meaning that you can take them with you anywhere you wish to.
But wheeled models are considered “personal property” — not real estate – as they aren’t attached to the ground in any way, shape, or form. So, you won’t be able to get a mortgage if your house is on wheels, as the lender will view it the same as an RV, boat, or another type of vehicle.
If, however, you just want a tiny home on a big piece of land, a mortgage may be more in reach.
4. Minimum square footage requirements
Remember the zoning laws I talked about? Well, turns out that communities aren’t the only ones that have restrictions on minimum square footage.
Some types of mortgages, like an FHA loan, have minimum square footage requirements to approve your home for financing.
Likewise, some lenders also have minimum square footage requirements to finance homes, so you’ll have to dig into that first, to see if your tiny home in fact meets these requirements.
If you can get a mortgage, should you?
Just because it’s possible to get a mortgage for a tiny home, that doesn’t mean you should.
Although mortgages do offer longer repayment terms than other financing options and lower interest rates, they will take away some of the main benefits of living the tiny lifestyle. This includes the freedom to take the house with you wherever you want, and the potential to get a property at a dirt-cheap price.
So, if those two factors are the main reason you’re looking into tiny homes, you may want to look into other financing options that are more flexible, and less of a headache to secure.
Your other tiny house financing options
Getting a mortgage for a tiny home may be a no-go, but that doesn’t mean that all is lost. You can still finance your purchase by choosing one of the alternatives below.
First up, we’ve got personal loans. Personal loans are a type of installment debt that doesn’t require any collateral. In other words, the lender can’t repossess and sell your tiny home if you default on the loan. Because of this, their interest rate tends to be on the higher side.
According to the Federal Reserve, the average two-year personal loan currently has an interest rate of 9.39%. That’s over four percentage points higher than the average interest rate for a mortgage, or an RV loan.
Personal loans also have much shorter repayment periods than the average mortgage or RV loan term, with most lenders offering a maximum of seven years to pay off your balance.
Besides that, you’ll need an excellent credit score (or at least good credit) to avoid paying a ridiculous amount of interest, plus have a solid financial situation.
On the bright side, personal loans don’t require a down payment or any closing fees, and some lenders, like LightStream, don’t charge any fees at all.
You also won’t have to wait an extended period to get the funds. In fact, Nelson, from LightStream, says that their loans can even be funded the same day you’re approved for the loan, as long as there aren’t any follow-up questions.
So, how much could you get to purchase your tiny home using a personal loan?
Well, that will depend on many factors, of course, but lenders like LightStream, and SoFi, have loan limits up to $100k.
If the tiny home you’ve been eyeing is on wheels, then an RV loan is one of the best financing options you can explore. However, for this to be a viable option, your tiny home must be certified by the RV Industry Association (RVIA).
Just like mortgages, RV loans are a type of secured loan, which means that if you default on your payments, the lender can take possession of your tiny home.
Despite this, there are more benefits than drawbacks when it comes to choosing an RV loan as your financing option.
RV loans also have longer repayment terms than personal loans, with most companies offering maximum repayment periods, ranging from 15 to 20 years, which translates to a lower monthly payment.
But one of the most beneficial aspects of getting this type of loan is that if you declare your tiny home as your primary residence, the interest is tax-deductible, which can significantly reduce your tax bill.
The only major downside of using an RV loan to finance your purchase is that you’ll be required to pay a down payment, which can be anywhere from 10% to 20% of the home’s purchase price.
Some tiny home builders, like Mustard Seed Tiny Homes, for example, offer financing on their models.
If your builder happens to offer this, Weissmann, from Tiny House Company, says that this should be one of the first options you should consider, as manufacturers know all the ins and outs of the industry and will work with you at every step of the way to help you secure the loan.
Another good thing about financing through your tiny home builder is that those that offer tiny homes on wheels, sometimes allow you to trade in your old RV, which can significantly reduce how much you’ll need to borrow.
You can also get a repayment plan similar to that of a mortgage loan. For instance, Weissmann tells me their company has financing plans available with repayment periods of up to 25 years.
A home equity loan
If you’re one of the lucky millions who already own their homes, and are itching to get a taste of the tiny living lifestyle, you could tap into your equity to finance your purchase. Weissmann says:
“It’s not common. We might see like 1% or 2% of the people out there who are buying tiny houses get loans for them that way.”
But using your equity to purchase a tiny home has its benefits, such as lower interest rates than those of personal loans, and a longer repayment period.
Still, you need to take into account that since home equity loans are a type of second mortgage that allows you to borrow against your home’s value, that means that your mortgage payment will go up, and, if you default on the loan, you could face foreclosure.
Other factors to keep in mind before financing a tiny home
You’ll need land
If you want to buy a tiny home with a foundation, instead of wheels, you’ll need a plot of land for it.
Although you could rent a space, it’s typically best to own the land where your tiny home is going to be, so you can have more control over your surroundings.
But purchasing land can be very expensive. This is especially true if you need to develop it. According to Tiny House Talk, depending on where you live, you can expect to pay as much as $40,000 on the land alone.
Parking wheeled models can also be expensive
Just because your house has wheels doesn’t mean you can park it anywhere you want.
One of the most common places you can park your tiny home is at an RV park, which also comes at a cost. Weismann points out the issues here:
“The lowest I’ve seen for RV parks is probably $350 a month — and that’s going to be in a very remote area, which isn’t so bad. The problem, however, comes if you choose a park that’s close to the city or another urban area. Those can be as high as $1,000 a month.”
Resale value may be low
Tiny homes — especially wheeled models — depreciate similarly to RVs and other vehicles. In other words, you may not be able to recoup your initial investment, nor profit from it, should you decide to sell.
Getting a tiny home loan requires some out-of-the-box thinking, but it’s all worth it. Not only will you save money on the house itself, but also on utility bills, and upkeep. The best part? You’ll help the environment by reducing your carbon footprint (and, of course, you’ll have the daintiest house on the block).