The tiny house movement is sweeping the nation, and many people have chosen to forgo a consumer-culture lifestyle and minimize both their owned items and owned living space. However, just because a house under 400 square feet is cheaper than a larger home doesn’t mean it isn’t hard to save up for.
As most prospective homeowners look to a mortgage for their house-buying needs, it seems natural to ask: Will a mortgage cover your tiny home?
The big issue with mortgages is that most of them require your home to be on a permanent foundation, and one of the biggest benefits of a tiny home is its potential mobility. In addition, most mortgage lenders have minimum loan amounts, meaning they won’t be willing to give a tiny loan for a tiny house. However, if your tiny home is built according to the proper regulations on a proper foundation, then it is possible you could get a mortgage lender to agree to finance it.
There are also some lenders who offer a “chattel mortgage,” which is a mortgage for movable property. This can be perfect for those who want to build or buy a tiny home on wheels like an RV or trailer home. Chattel mortgages are often faster to pay off than regular mortgages, due to their lower loan amount, but they also tend to have higher interest rates. However, if a chattel loan won’t work for your situation, there is another type of loan that might.
If, for whatever reason, a mortgage won’t work for your situation, do not fear! There are plenty of other ways to finance a tiny home. One example that is perfect for homes on wheels is a Recreational Vehicle or RV loan. RV loans offer lower interest rates than personal loans and repayment terms can be up to 15 years.
In order to qualify, your home has to be certified by the Recreational Vehicle Industry Association. In other words, it has to meet certain manufacturing and road-safety standards to qualify as an RV. Therefore, if you plan on eventually putting your home on a firmer foundation or don’t plan to take it on the road often, this may not be the best loan for you. If your house can’t get certified, you won’t be able to qualify for this loan.
If your home won’t qualify for an RV loan, there’s always the classic personal loan. These loans will often have shorter repayment terms, such as 7 years, which means you can pay off your home much faster than you could with a regular mortgage or even an RV loan. However, the monthly payments are often just as high for personal loans.
Because personal loans are unsecured, you will usually need a high credit score and meet necessary income requirements to qualify for one. If you don’t, you may need to choose a secured loan and put your tiny house up as collateral. While this option can give you the financing you need, it also puts you at risk of losing your house or another major asset if you can’t make the proper payments.
Tiny House Builder Loan
Another option is to get a loan specifically for a tiny house by working with a lender that partners with a tiny house builder. These loans can often be easier to pay off as they offer lower rates and longer repayment schedules than personal loans. However, a tiny house builder loan does usually require a down payment like a mortgage does of at least 20% of the house’s price.
Tiny house loans can be secured or unsecured as well. This loan option might be best for those looking for an alternative to a mortgage for a house on a foundation that can’t qualify for an RV loan.
Home Equity Loan
Finally, the home equity loan is a good option for those who already have a full-sized home and are trying to build an additional tiny home on their property. This can be a good option for those with large property or homesteads, or large families trying to add smaller housing structures for adult children and their kids.
Like the tiny house builder loans, home equity loans offer low rates and long repayment terms. As the name suggests, you do need home equity to get approved, and this loan does put your primary home at risk of repossession if you can’t make payments on the tiny home.
Home equity loans also have limits on how much you can borrow. This limit is determined by your home-to-value ratio, which is the amount of debt you have on your primary residence and home equity loan divided by the house’s fair market value.
The financing terms can also vary depending on whether you choose a home equity loan or a home equity line of credit (HELOC). Unlike a home equity loan, which offers fixed interest rates and long repayment terms, HELOCS usually offer variable rates of interest and allow you to pay down your balance and borrow again from the line of credit, similar to how you can pay down and re-borrow with a credit card.
Other Financial Issues
When it comes to financing your tiny home, there are a number of hidden costs to keep in mind. While a tiny home often costs much less than a full-sized home (on average, they cost between $10,000 and $40,000), you may also need to pay slightly more for things like compact appliances and homeowner’s insurance.
In addition to property taxes, maintenance fees, repairs, and potentially homeowner’s association fees, tiny home owners may have to buy land separately or pay extra to store items that will not fit in the house. RV and mobile home owners may need to pay for RV parking at campgrounds, gas, permit fees, and lot leases. Other tiny home owners may need to pay extra for tankless water heaters or portable washing machines that will fit in the home.
While overall a tiny home is cheaper than a larger home, these other costs may surprise the unprepared.
While many people focus on the exciting parts of tiny home building, such as planning spaces and thinking of creative ways to minimize, financing is still important to consider. Whether you want to build your home slowly over a number of years or work with an established builder, it’s important to look into loan options.
As it turns out, it is possible to get a mortgage for your tiny home if certain criteria are met—but you shouldn’t lose hope if your home doesn’t fit the lender’s requirements. Chattel mortgages, RV loans, personal loans, home equity loans, and lines of credit can all give you the ability to pay off your tiny home like you would a larger home. And while you should understand that a tiny home, like any home, has plenty of associated costs, you will in most cases be able to pay off those costs faster or at a much lower rate than you would with a traditional mortgage.
by Deborah Goldberg