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How to Get Tiny House Financing

US News & World Report -  Money logo US News & World Report - Money 7/7/2021 Ben Luthi
young woman sitting outside her tiny house © (Getty Images) young woman sitting outside her tiny house

Tiny houses are pint-size dwellings, mostly between 100 and 400 square feet, built for simpler living and smaller budgets. Financing for a tiny house can get tricky, though.

You may have a hard time finding a traditional mortgage, leaving you to seek alternative financing options. This is because mortgage lenders have minimum loan amounts and offer loans only for homes on permanent foundations. Tiny homes, however, typically cost less than mortgage minimums and are frequently built on mobile frames.

Depending on the situation, you may be able to use a home equity loan or line of credit, a recreational vehicle loan, or a personal loan. Choose wisely. Each financing option for building or buying a tiny house has benefits and drawbacks.

Why Tiny Homes Are Popular Now

Tiny homes started gaining traction a few years ago, but since the coronavirus pandemic began, they're getting more attention, either as a place to live or as an office for remote work.

According to a 2020 survey by IPX 1031, a subsidiary of Fidelity, 56% of respondents said they would live in a tiny home, primarily for affordability but also because the homes are efficient, eco-friendly and mobile.

Additionally, 62% of remote workers surveyed have considered buying a tiny home to serve as a backyard office.

What to Know About Tiny Houses

There are two types of tiny homes: a home on wheels, which could qualify as a recreational vehicle, and a home built on a permanent foundation.

Prices vary as widely as home styles. The average tiny house costs between $10,000 and $30,000 if you build it yourself, according to the tiny house blog The Tiny Life. Costs double if you hire a builder. The price can hinge on how many bells and whistles you add and may even reach six figures.

If you're planning to put a tiny home on your property, says Matthew Davies, founder and CEO of real estate management company Harmony Communities, "your first step would be going to your local building department, whether for the county or the city, and finding out the zoning regulations."

What Are Your Tiny House Financing Options?

Tiny house loan choices can be limited. You may need to consider multiple financing options to ensure that you get the money you need. Here are just a few possibilities:

Mortgages

You may struggle to find information online about mortgage lenders who will work with tiny house buyers. "If someone is building a tiny house on a foundation, in compliance with all requirements and local building codes and requirements, it could be possible to obtain a mortgage," says Joe Toms, president and chief investment officer at FreedomPlus, a personal lender.

Even so, a tiny home mortgage, sometimes called a chattel mortgage (a mortgage on movable property), can come with a shorter repayment term because the loan amount is much smaller than usual. You may also end up with a slightly higher interest rate because small loans require the same work as big loans and the lender is trying to make a profit.

Home Equity Loans or Lines of Credit

If you already own a home and want to add a tiny house to your property, you may be able to tap your home equity to get the money you need.

Instead of a home equity loan or HELOC being secured by the new tiny house, it is secured by your primary residence. This means that if you have trouble paying back the debt, your main home could be seized to satisfy the loan.

Also, keep in mind that you may be limited in how much you can borrow. Many home equity lenders only allow you to borrow up to your combined loan-to-value ratio. This is the amount of debt between your first mortgage and home equity loan or HELOC, divided by your home's fair market value.


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The terms of your financing can vary, depending on whether you choose a home equity loan or HELOC. Home equity loans, for instance, typically have fixed interest rates with repayment terms ranging from five to 30 years.

A HELOC often has a variable interest rate and a draw period when you can pay down your balance and borrow again from your line of credit, as with a credit card.

After this initial period, you'll make full payments until your debt is paid off. HELOC terms can range from five years up to 30 years, depending on the lender.

The interest rate on a home equity loan or HELOC can be higher than what you might pay on a traditional mortgage.

RV Loans

If your tiny home is built on wheels, it may qualify for a recreational vehicle loan.

"The main problem, though, is that RV loans are designed for RVs, not primary residences," Toms says. "If someone is looking to finance a tiny home as the primary residence, it will be tough to make it work."

To qualify for an RV loan, your home needs to be certified as an RV by an organization such as the RV Industry Association.

With an RV loan, you can expect relatively low interest rates compared with personal loans. Repayment terms may be up to 15 years, giving you plenty of time to pay off the purchase.

Personal Loans

Many personal lenders allow you to use personal loan funds for just about anything, including buying a tiny house. Some lenders even offer personal loans for as much as $100,000, giving you a lot of flexibility when choosing a tiny home model.

Personal loans can be appealing because they often don't require collateral, so you won't lose your tiny home or any other major asset if you can't repay what you owe.

But personal loans typically offer much shorter repayment terms – usually two to seven years – compared with other tiny house financing options. And shorter terms could make your monthly payment unaffordable.

Personal loans also tend to have higher interest rates than other financing options. The average two-year personal loan carries a rate of 9.46%, according to the Federal Reserve. And your terms may be far less favorable if you need a longer repayment timeline and have less-than-perfect credit.

Still, some personal lenders look at nontraditional credit information to determine your creditworthiness, Toms says, which could improve your approval odds.

Where You Can Get Tiny House Financing Options

Depending on the type of loan you choose to pursue for your tiny home, there are a number of lenders that can help you get the funding you need.

With personal loans, for instance, LightStream offers a loan that's specifically designed for tiny homes. Other lenders that offer relatively high loan amounts include SoFi, Upgrade, Upstart and Best Egg.

If you own a property and don't plan on selling it, you can get a home equity loan or line of credit through your existing mortgage lender or through a home equity lender, such as PNC, Bank of America or Flagstar Bank.

With other loan options, do your research and compare interest rates, repayment schedules and other terms to determine which is the best fit for you.

Other Factors to Consider About Tiny Home Financing

Getting the right loan to buy a tiny house can be time-consuming enough, but it's not the only aspect of tiny home buying to be diligent about. Don't forget to:

Budget for your monthly payment. Mortgage lenders have strict criteria for determining how much you can borrow. This is to help protect you from taking on more debt than you can manage. But you might not get that same help from other lenders.

Payments on a tiny home will likely cost less than, say, a 30-year mortgage on a traditional home. But you'll still want to run the numbers to make sure your payment lines up with your budget.

Consider the hidden costs of tiny house living. Overall, living in a tiny home can be less expensive than in a traditional home. But you should budget for certain extra costs when calculating your loan payment and expenses.

For instance, you may need to fork over more cash for specialized compact, efficient appliances. And because tiny homes often sit in a gray area of real estate, you may have a hard time finding homeowners insurance. You may need to purchase more than one type of insurance, with overlapping coverage to get what you need.

Other potential hidden costs include:

  • Storage fees for items that don't fit in your home.
  • The cost of leasing land, unless you own the property where you will build or park your tiny home.
  • Higher food costs due to lack of storage and the ability to buy in bulk.
  • Laundry expenses, although you can purchase a portable washing machine.
  • Transportation and setup costs if you buy the home from a factory.

Can I Finance a Tiny Home With Bad Credit?

It is possible to get approved for financing for a tiny home with bad credit. You can get approved for a personal loan even if your credit is bad, and some other loan options may also be available. However, you'll have a tough time getting approved without a co-signer. Even if you do get approved, you can expect to pay high interest rates, which may not make it worthwhile until you've had a chance to improve your credit history.

Copyright 2021 U.S. News & World Report

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