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Buy a Tiny House
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So You Want to Buy a Tiny House

So-called “tiny” homes—those with a footprint topping out at 500 square feet—have grown increasingly popular among those seeking a simplified lifestyle, a readymade accessory unit at an existing home address (a backyard cottage, Airbnb rental, or “She Shed”), or those hoping to find an affordable primary home to plunk on a lot or a way to homestead in a rustic community.

But before falling in love with the latest mini-cottage or shipping container-style box house, would-be buyers need to understand that financing these homes is more complicated than mortgaging traditional real estate.

First, Location

For starters, would-be tiny home dwellers will need to own a piece of land—or have access to land they’ve rented or that a friend or family member is letting them use.

If you’re shopping for land, the community where you’re shopping may have zoning rules about how the land is to be used and what type of property can sit on the land.

If you find an applicable lot and need to finance its purchase, know that land mortgages typically require a 20% minimum down payment on what is most often a 20-year loan; land prices vary widely by state, location, the size of lot or acreage, and whether they include utility hookups or water rights.

Assuming you’ve got access to a lot out of the way, a tiny house fan’s next step is finding and buying a house.

Tiny Home Shopping: No Mortgages Yet

Some tiny home purchasers build a home themselves from a kit or model, but many opt to buy a prefabricated structure from a manufacturer who will then deliver the home to your site. Check out Small House Society for some popular builders.

It’s important to use a proper contract and also understand whether a builder warranty travels across state lines—a legit issue if you’re buying out-of-state and moving the home to your site.

Tiny homes vary widely in price (from $20,000 to $100,000 and up, depending on features and finishes) but it’s safe to say they’re typically less expensive to purchase and operate than their larger counterparts such as an inexpensive older house in the countryside or even a studio apartment in a semi-urban place.

Even an older small house, while compelling, may incur expensive utility bills or renovation costs to make it as energy efficient as a tiny home.

Tiny home buyers may think the idea of a mortgage on a nicer $90,000 tiny home is deliciously low-sounding—a 10% down for a borrower with good credit would lead to their paying below $450 per month for their mortgage.

But there’s just one problem here: It’s still not possible to get a mortgage loan for a tiny home, either because these homes’ ‘value’ typically fall beneath the $100,000 floor some lenders require or because a loan on a tiny home loan cannot be “securitized”—investor-speak for the process in which a lender bundles and resells groups of mortgage loans as “mortgage-backed securities” to investors.

While it would be possible to finance an inexpensive single-family home or a manufactured home affixed to a foundation (through programs such as FHA), the rules shift a bit for tiny homes.

Indeed, some two-thirds of all tiny home buyers don’t finance their purchases with a mortgage. Instead, that may mean saving the cash for the purchase, or if they already own a lot or are adding a tiny home to a lot with an existing house on it, mean taking a home equity loan against their existing property.

The remaining one-third of tiny home fans must find alternative means to finance their purchases.

Your Financing Options

There are essentially three options for would-be tiny home dwellers: Builder financing, personal loans, and RV loans.

This has traditionally left those who need to borrow to finance a tiny home purchase dependent on tiny home manufacturer financing (which can vary widely by manufacturer), personal loans (which are going to carry higher interest rates than a mortgage but lower rates than credit cards), peer-to-peer loans, or sometimes RV loans (available in some cases for tiny homes on wheels, typically carrying lower rates than personal loans).

Among manufacturer financing, for example, California’s popular Tumbleweed Houses advertises availability of a 15-year loan at a 4.95% interest rate for those who can put 20% down on one of their homes, which start at prices just above $60,000. This rate tracks higher than 15-year mortgage rates, which in early 2017 were just over 3%, but the loan amount is small.

On the personal loan front, LightStream, a division of Suntrust Bank, offers them for up to $100,000 and with terms up to seven years, which may be applicable to tiny houses set on foundations as well as those qualifying as recreational vehicles (RVs). Rates vary from 5% to 10%–higher than a conventional mortgage. Earnest also offers personal loans that could be used toward the purchase of a tiny home; rates vary from 5.25% to 12%, with terms up to three years.

If a tiny home has wheels and is transportable, RV loans may be an available option—but the tiny home will need to fulfill requirements set by the RV Industry Association or else you’ll be ineligible for this financing.

A tiny home manufacturer ought to be able to confirm whether or not it is building to RVIA specs. RV loans generally carry lower interest than personal loans—because these loans are made against an asset (the RV), rather than against an individual’s credit (personal loan).

The big promise of tiny homes is that they are affordable because of their building price and energy consumption—an attractive proposition for cash-strapped young adults, minimalists, vacation getaway seekers, or those who want to plunk a prefab cottage in their backyard and turn it into rental income.

While the interest rates available for these borrowers aren’t as favorable as those for borrowers biting off a bigger bite of housing pie, there are options—and chances are conventional mortgage underwriters and the lending community will continue to innovate as these homes’ popularity continues to proliferate.

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Earnest is a technology company using software automation, smart design, and exceptional service to restore trust in the lending industry and help clients take control of their finances.