Written by Rebecca GrahamRebecca Graham is BestCompany's expert on home loans and cell phones, empowering readers to make the best financial decisions based on data and research. Rebecca unplugs from consumer culture on occasion to hike with her family.
Among non-homeowners, 75 percent consider owning a home part of their American dream.
So what’s stopping them from making it happen?
According to a recent survey, the top three barriers to homeownership are
- Cost of a down payment
- Cost of monthly payments
- A lack of overall savings
Money, money, and more money.
Enter tiny homes.
With 91 percent of single-family home buyers favoring homes 2,000 square feet or bigger, living large is still king, and tiny homes are the exception rather than the norm. But they’re becoming more popular, and finances play a role.
Say what you want about the lifestyle aspects of this “trend,” but tiny houses — especially DIY ones — are dirt cheap compared to the typical single family home or condo. The financial barriers to tiny home ownership simply aren’t as daunting.
Still, a professionally built tiny house costs around $60,000 on average — far more cash than many potential buyers have on hand. And tiny home financing can come with unique challenges.
So, how can (and can’t) you finance a tiny house?
Can I finance a tiny home with a mortgage?
The short answer is no. There are a few exceptions, but you should assume you won’t be able to finance your typical tiny home with a mortgage.
The bank wouldn’t make enough from the arrangement
While there’s not a universal minimum loan amount, banks generally won’t fund mortgages under $50,000. It’s not cost-effective for lenders to do the work with less than that because they only charge origination fees of 0.5 percent to 1 percent of the total loan amount.
It’s not considered real estate
A mortgage cannot finance anything mobile, including a mobile or manufactured home, a titled trailer, or a tiny home on wheels. It requires a permanent, foundation-affixed home.
Shawn Breyer, owner of We Buy Houses Chattanooga, describes the distinction:
“Not all tiny homes are considered real estate. If a tiny home has wheels, then it is considered personal property. To be considered real estate, there must be property taxes on the asset. Without a recorded title and plat [a map showing the divisions of a piece of land], there are no property taxes and it is not considered real estate. There's a difference in financing options for personal property versus real estate.”
The property can’t be appraised
An appraisal is primarily based on comparing a home to homes with comparable square footage that have sold within the previous year. And since tiny homes are relatively new, there generally aren’t enough homes for a meaningful comparison to take place.
Matt Hackett, operations manager of Equity Now, expounds on the roadblocks to appraisal:
“Fannie Mae doesn't have a minimum square footage requirement for a home, unless the property is a condo, coop, or a manufactured home. In that sense, there is nothing in the standard underwriting guidelines preventing the financing by mortgage of a very small home, but the home needs to conform to the neighborhood and there have to be enough similar sales for an appraiser to be able to determine an opinion of market value.”
There are exceptions to the rule
However, you may be able to secure a mortgage in certain regions if specific conditions are met.
Joe Toms, president of FreedomPlus explains how:
“Mortgage loans are offered only for homes that are built on permanent foundations. While most tiny homes are built to be mobile, if someone is building a tiny house on a foundation — and complying with local building codes and requirements — they may be able to qualify for a mortgage.”
Buildings Guide is a good resource to check out the requirements and codes in your area.
Can I finance a tiny home with an RV loan?
Yes. Some tiny home manufacturers, such as Tumbleweed Tiny Houses, provide financing to purchasers through RV loans. To obtain an RV loan, the home must first be certified to meet manufacturing and safety standards by the Recreational Vehicle Industry Association.
Adele Alligood, financial advisor for EndThrive, says the benefits of using an RV loan include the relative simplicity of the process compared to that of a mortgage and the fact that you generally aren’t required to put up collateral.
However, this solution isn’t perfect. Alligood explains that “to secure an RV Loan, you need a steady income, good credit, and somewhere else that you can call your primary residence.”
An RV loan works if your tiny house will be your traveling home, your second cottage, or getaway. But if you intend for your tiny home to be your primary residence, you need another answer.
Can I finance a tiny home with a personal loan?
In almost every case, yes. A personal loan can help you pay for the costs of building a new tiny home or purchasing a pre-owned one. Typical personal loan amounts range from $2,000-$50,000, but some companies will lend borrowers up to $100,000.
It offers flexibility
The main advantage to a personal loan is that it can be used for any purpose the borrower wants, whether that’s paying for materials for a DIY build, labor costs for a professional builder, a plot of land, or a F-350 sized truck, which you’ll likely need to pull a movable tiny home.
It may be easier to qualify
Independent personal loan companies use different criteria than a traditional bank or credit union to evaluate a person’s repayment liability. According to Toms, “This can be especially helpful for someone whose credit profile may not reflect his/her ability to repay, or for someone wanting to use the loan for a non-traditional purchase such as a tiny home.”
Conditions still apply
However, that doesn’t mean personal loan standards aren’t stringent. The higher your credit score, the better interest rate you’ll qualify for. Conversely, a personal loan can be a disadvantage if your credit is poor. Alligood warns, “If your credit is less than ideal, a personal loan could cost as much as a credit card loan or more.” Plus, some personal loans come with prepayment penalties.
Can I finance a tiny home with my home equity?
With a home equity line of credit (HELOC), you can use your home as collateral for a loan amount, which could go towards a tiny home build or purchase. You can draw on that line of credit for a certain draw period, then repay the amount you borrowed along with interest.
A different home equity option is a “co-investing” model like that offered by Unison.
With Unison, a homeowner can get paid up to $500,000 or 17.5 percent of the home’s value as a one-time payment to be used at the consumer’s discretion, such as building a small or tiny home as an Accessory Dwelling Unit (ADU) on their property. Then, when the homeowner decides to sell or buy Unison out, Unison gets a share in the appreciation of the home. Both parties benefit if the home increases in value and both share in the loss if the home decreases in value.
Unison strategist Amin Mirzadegan says that Unison’s model is different than a home equity loan or line of credit in that homeowners don’t garner any added debt, monthly payments, or interest.
“Additionally,” Mirzadegan explains, “Unison customers who increase the value of their home by building an ADU also benefit from the Remodeling Adjustment feature, which allocates 100 percent of the value attributable to a home improvement project to the owner, so Unison doesn’t share in any value gained from the project itself.
While an ADU is not considered an independent piece of real estate on its own land or personal property like a mobile tiny home, it’s becoming an increasingly popular option for multi-generational or caregiver households.
Thinking outside the box
Of course, it would be ideal to pay for your tiny house out of pocket. Or to procure the money you need without dealing with the complicated technicalities of loans from financial institutions. Consider these additional ideas as you make your financing decision. Regardless of the option you choose, be clear on the nitty-gritty of all terms and conditions.
- Borrow from friends or family. Come up with an agreement that benefits you both, such as an interest payment that compensates them well, but is less than what you’d pay a bank.
- Save aggressively. Forego as many non-essentials as you possibly can. Live like no one else now, so you can live like no one else later.
- Build as you go. If you’re not in a time crunch, purchase materials for your tiny home in waves as you have the money, and not all at once.
- Consider manufacturer financing. Some manufacturers have their own financing options set-up so you don’t have to worry about working with a third party.
- Look into peer-to-peer lending. There are tiny home communities online that are invested in the tiny home movement. And some individuals will invest in a borrower’s tiny home.
- Try a chattel mortgage. Similar to a car loan, the lender owns your home until you finish paying off the loan. This is a good option if you park your tiny home on leased land or you move frequently.
- Don’t forget about using credit cards. But proceed with caution! If your credit limit is high enough to cover your costs and you’ll be able to pay your bills off quickly, this can work.