Whether it’s the appeal of a minimalist lifestyle or the pressures of rising home prices, more and more aspiring homeowners are embracing the trend of small space living. According to a survey by the National Association of Home Builders, more than half of Americans are open to the idea of reducing their living quarters to 600 square feet or less.
Now, tiny house financing is a big stumbling block people encounter on their way to tiny homeownership. So we decided to address the issue and talk about the financing options you have to help you along the journey.
Why would you need to finance your tiny house?
While getting your own tiny house is assuredly cheaper than buying or building an average single-family home, it still requires some investment on your part. The average cost of tiny houses can run anywhere from a few thousand dollars to up to $90K, depending on the size, add-on amenities, custom features, and whether you’re doing it on your own or hiring a professional to do the job.
A prebuilt tiny house shell, which you can put together on your own, can come for less than $10K. But there’s a cost involved in purchasing land or leasing a lot. If you plan to move around with your tiny house, there are a few additional expenses to consider. Renting RV spots for parking, registration and licensing fees — not to mention, the cost of the vehicle itself.
Therefore, unless you’ve got thousands of dollars lying around in your bank account, you’ll need financing to pursue the dreams of owning a tiny house. But here’s a caveat: You may not get a mortgage loan to fund your tiny house project.
Why your tiny home may not qualify for a mortgage?
There are many reasons for this. For one, these houses are often too small to meet the minimum square foot requirement to be eligible for a mortgage.
Secondly, to be eligible for a traditional mortgage, the house must rest on a permanent foundation. This specification rules out tiny houses on wheels and mobile micro homes.
Thirdly, most banks have a minimum limit on the amount you can borrow.
That’s not to say that the doors of traditional mortgage loans are shut to you. If you have a good relationship with your bank and have been diligent with your payments, they might see you as an “ideal” client. In that case, they may be willing to work with you.
If your tiny home has the square footage to comply with local building codes and is permanently affixed to the property, there’s hope for a traditional mortgage. But remember, you'd have to borrow more than you probably need.
Nonetheless, there are other financing options that you can explore. Here’s a list:
Recreational Vehicle loans are a great way to finance your tiny home on wheels. But it must be certified by the Recreational Vehicle Industry Association (RVIA) and built by a manufacturer. You can get these loans through banks, credit unions, or lenders that specialize in RV loans.
A significant drawback here is that RV loans typically cover temporary homes. So if you intend to use a tiny house as your primary residence, this may not be for you.
Home equity line of credit (HELOC)
If you already own a property and want a tiny house as a second home, you can consider this option. It allows you to borrow against the existing mortgage on your primary residence. On the downside, HELOC is a secured loan where your home acts as the collateral. Meaning, you risk foreclosure on your home if you default on your payments.
If you’re looking for a relatively easy loan process that also comes with few restrictions on how you use the money, this is it. A personal loan can fund your tiny house project, regardless of whether it’s on wheels or on a foundation. You could even use it for purchasing land to build your tiny house.
However, personal loans are not without their cons. Unlike a HELOC or an RV loan, personal loans are unsecured and don’t involve collateral. Lenders, therefore, charge a higher interest rate on these loans. Also, these loans have a short repayment period, which means you’ll have less time to pay back the debt.
Some lenders like LightStream specialize in tiny home loans and will offer you significantly lower interest rates and better repayment terms. All you need is a decent credit score to back you up.
Financing via manufacturer
Not all tiny house builders arrange to finance for their customers. So you get this option only when you work with those tiny house manufacturers that offer in-house financing.
So shopping around for a manufacturer or builder, it’s a good idea to check whether they offer finance. Even if they don't, they can probably provide some advice or direct you to possible financing sources their customers may have used.
Peer-to-peer lending platforms
P2P lending platforms have emerged as a platform to connect borrowers and third-party lenders. Interestingly, many of these lenders are individuals who support the tiny house movement. So rather than moneymaking, they are in it to help people turn their tiny living dreams into reality. LendingClub, Prosper, and Tiny House Loans are some of the leading names in this category.
Here’s a relatively less-known financing option. A chattel mortgage is very similar to a car loan, and unlike an unsecured personal loan, it’s offered against your vehicle or tiny home. For buyers who plan to set up their tiny house on leased property, a chattel mortgage may be an ideal solution.
So don’t despair if you’re facing a need to fund your micro dwelling project. With these alternatives up your sleeve, tiny house financing shouldn’t be a bumpy ride.