The tiny home craze has caught the attention of everyone from eco-friendly folks to reality TV addicts. Depending on what type of person you are, the idea of reducing your living quarters to less than 400 square feet on wheels sounds like either a nightmare or a dream.
If you fall into the latter camp, you’ve undoubtedly fantasized about the simple, carefree existence of tiny house living. You might even be seriously considering moving into one. But before you set your sights on a miniature dream home, know there’s one major financial catch:
You can’t use a mortgage to pay for it.
Why tiny homes don’t qualify for mortgage loans
Mortgage loans carry benefits that would make them an attractive option for financing a tiny home, such as tax write-offs on the interest. Unfortunately, even if a tiny house is going to be your primary residence, there are a few factors that make it just about impossible to mortgage.
There’s no way to appraise the property.
Tiny homes differ from traditional homes in ways beyond just size. And those differences can make it tough to appraise the property ― a key step in mortgage underwriting.
“The appraisal is based largely on square footage,” explained Corey Vandenberg, a mortgage banker in Lafayette, Indiana. He said that often, there is a minimum square foot requirement to get a mortgage.
Further, said Vandenberg, lenders evaluate comparable properties sold within the previous 12 months. Since tiny homes are still a pretty new trend, there may not be enough data for your neighborhood. “This is particularly a challenge in rural areas,” said Vanderberg.
Mortgages aren’t supposed to move.
One of the most attractive qualities of a tiny house is that it can be mobile. Sick of the snow in Boulder? Pick up and move to Miami.
But when it comes to getting a mortgage, that’s a problem.
“That makes it a mobile home or a titled trailer, not a permanent foundation-affixed home, which a mortgage requires,” explained Vandenberg. Even if your tiny home is sans wheels, you’d need to own the land underneath it to potentially qualify for a traditional mortgage.
The loan would be too expensive to fund.
The Spruce estimated that you can buy a professionally built, Pinterest-worthy tiny home for about $60,000, or you build your own for as little as $12,000. While those low numbers are great for you, they’re not so attractive to banks.
When you apply for a mortgage, the lender has to spend time running your credit, evaluating your application and underwriting the loan. The process of approving and funding a loan requires the same amount of effort whether you borrow $60,000 or $600,000. But since most banks charge origination fees of 0.5 percent to 1 percent of the total loan amount, it isn’t cost-effective unless they’re lending a sizable chunk of change. In fact, banks will usually only consider a mortgage of at least $50,000, according to Allison Bethell, real estate investor analyst for real estate site The Close.
Financing alternatives for tiny houses
Just because you can’t take out a mortgage on a tiny home doesn’t mean your dream is out of reach. There are a few other financing options that could work, depending on factors such as the type of home and your creditworthiness.
RV loan: If your tiny abode is road-ready, you might be able to use an RV loan to finance the purchase, according to Bethell. These loans tend to be a more cost-effective option if you qualify, with average rates around 4 percent for a term of four years to six years.
As tiny home manufacturer ZeroSquared explains on its website, “Financing a vehicular asset is typically an easier process than trying to secure financing for a tiny house.” To do that, however, your home needs to be certified as an RV by an organization such as the Recreational Vehicle Industry Association.
Personal loan: Another option to consider is a personal loan, which allows you to borrow money for a wide variety of purposes and often doesn’t require any collateral. “A borrower with a high FICO score and consistent employment may qualify for a personal loan,” said Bethell.
If you take this route, expect to pay a higher interest rate. Borrowers with good credit pay about 10 percent to 12 percent, on average. Check with credit unions and online banks to find the best deals.
Home equity loan: If you’re already a homeowner, but want to dabble in tiny home living, you could be a good candidate for a home equity loan or line of credit, said Bethell. This option is a bit riskier because your home serves as the collateral. However, these loans tend to be low-interest, with average rates hovering just below 6 percent right now.
Peer-to-peer lending: Because members of the tiny home community tend to share similar values, there are likely to be some investors who want to help put people in their very own tiny dwellings. P2P lending websites such as Prosper and Lending Club help match borrowers with individual lenders who are able earn a return on their investment. The terms of each loan are set by the investor.
The tiny home trend doesn’t seem to be going anywhere soon, and as more lenders become familiar with the tiny home market, there will likely be more loan options, too.
In the meantime, don’t despair if you want to downsize ― there’s likely a solution out there for you.