Tiny House Financing: How to Get a Loan for a Tiny House
A tiny house might be perfect if you’re looking to simplify and you don’t like staying in one place for too long.
One perk of tiny house living is that these properties are considerably less than a house.
And, sometimes with the home on wheels, there’s the freedom to live anywhere.
But while some are making a permanent switch to tiny houses, financing these types of dwellings is different from financing a house.
Quite commonly, you can’t get a traditional mortgage to buy a tiny house.
If you’re thinking about joining the tiny house movement, here’s a look at different financing options.
Tiny House Financing Options
If you’re looking to make a tiny house your primary residence, you might ask:
"Why can’t I use a regular mortgage to finance this home purchase? "
It might seem illogical for a mortgage lender to reject these properties. To understand their reasoning, you must first know a few things about mortgage lending.
Unknown to some, mortgage lenders often impose minimum loan amounts.
This minimum varies from lender-to-lender, but it’s usually around $50,000.
The reason is simple — creating loans is a costly expense for mortgage lenders.
For example, a mortgage company might have production expenses as high as $8,000 per loan. Often, their expenses are the same regardless of whether they originate a high-value loan or a low-value loan.
Lenders want to earn as much profit as possible. And unfortunately, a $10,000 or $15,000 tiny house isn’t always worth their time or effort.
Even when a tiny house costs more than a lender’s minimum, some banks still reject these properties. This is because mortgages also require that a property have a foundation.
But although a traditional mortgage doesn’t work in this scenario, other loans might.
1. Chattel Mortgage
This mortgage product might be unfamiliar to some, but it’s a loan specifically for movable property.
It’s commonly used by borrowers purchasing a mobile home.
This is also an option for a tiny house on wheels. Since it’s a mobile property, the lender can classify it as a mobile home.
These types of mortgages aren’t offered by all lenders, though. So your best bet is to work with a mortgage broker who can find the right lender. Additionally, the tiny house builder might recommend a financial institution.
Keep in mind:
Your tiny house secures a chattel mortgage.
So if you default on the loan, the lender can foreclose on your home.
Also, chattel mortgages typically have shorter terms, since they’re used for inexpensive properties.
The downside is that the interest rate on these mortgage is typically higher than the rate on a traditional mortgage.
2. Personal Loan
Another option is to purchase a tiny house using a personal loan.
If you’re approved, you’ll receive a lump sum of cash that you’ll use to pay for a tiny house outright.
Personal loans are often used for debt consolidation, home improvement projects, vacations, college expenses, wedding expenses. etc.
However, some people don’t think to use these loans for a tiny house.
You can get personal loans from banks, credit unions, and online lenders. The loan term with a personal loan is shorter than a traditional mortgage. This is a plus since you’re able to pay off the tiny house sooner. However, a shorter term also means a higher monthly payment.
Some personal loans are unsecured, which means you don’t have to pledge personal property as collateral. To qualify for an unsecured personal loan, you will need an excellent credit history.
Be mindful that unsecured loans have higher interest rates, though. But the benefit of an unsecured personal loan is that defaulting doesn’t put your property at risk of foreclosure.
Most personal loan lenders will ask about your intentions for the loan. If they learn that you’re using funds to buy a tiny house, you might qualify for a secured personal loan. In which case, your tiny house secures the loan.
These loans involve lower rates. But if you default, the lender can foreclose your tiny house.
3. Financing Through a Tiny Home Builder
Tiny home builders are an excellent resource for locating loans to buy a property.
These builders know that traditional financing doesn’t work for these homes. So oftentimes, they’ll partner with a third-party lender.
Once you decide on a specific tiny house, you can apply for financing with a builder’s network of lenders.
One benefit of using a builder’s lender is that you’ll receive a longer repayment term. These terms can be as long as 10 years.
However, the builder’s lender might require a down payment. You’ll also pay a higher interest rate compared to a traditional mortgage loan.
Also, the tiny home often secures the loan. So if you default, there’s the risk of losing your property to foreclosure.
4. Home equity loan or HELOC
Do you own an existing property?
If so, you might be able to pull cash from your equity using a home equity loan or a home equity line of credit (HELOC). You can then use this cash to buy the tiny house.
Some people buy a tiny house as a second home or as an investment property.
Maybe you have space on a piece of land that you own. If so, you can buy a tiny house and rent it out. It’s an excellent way to earn passive income from a rental property.
Or maybe you want to experience tiny house living for yourself. If so, you can rent out your current home and live in the tiny house full-time. Either way, using your home’s equity can help you achieve your goal.
With a home equity loan or HELOC, you’re usually able to borrow up to 80 percent of your home’s equity. These options also have repayment terms up to 10 to 20 years.
The difference, though, is that you’ll receive a lump sum of cash with a home equity loan. HELOCs are a revolving credit line that you draw from on an as-needed basis.
To qualify, you must have enough equity in your home. As a warning, your home secures a loan or line of credit. So if you can’t make either payment, you could lose this property.
5. RV loan
If you plan to keep your tiny home on wheels, it might classify as a recreational vehicle.
If so, it’ll then qualify for an RV loan.
These loans have higher rates than a traditional mortgage loan, but lower rates compared to a personal loan.
As a bonus, RV loans typically have repayment terms up to 15 years.
You can’t use an RV loan when a tiny house is your primary residence. It’s not considered a recreational vehicle if you live in it full-time.
How to Get Approved for Financing
Even if your plans include purchasing a tiny house in the near future, this will only happen if you’re able to qualify for financing.
Loan requirements vary from lender-to-lender.
However, bad credit or no credit doesn’t necessarily prevent getting financing. A lender might require a bigger down payment, though. And typically, borrowers with lower credit scores pay higher interest rates.
Before applying for a loan, here are a few tips to help ensure a smooth process:
1. Improve your credit
Some people don’t check their credit before applying for a loan, yet this is a crucial step in the loan process.
Your credit history doesn’t only determine whether you qualify for financing, it also determines your interest rate.
As a general rule of thumb, check your credit report before applying for any type of financing.
If necessary, take steps to improve your score. This includes paying your bills on time, paying down other debts, limiting your number of credit inquiries, and disputing errors on your credit report.
2. Save a down payment
Even if your lender doesn’t require a down payment, putting down some of your own cash has its benefits.
If you have a lower credit score, a down payment can build a lender’s trust in you, helping you qualify.
A down payment can help you negotiate a better interest rate.
It also reduces the amount you need to finance.
3. Shop around and compare rates
Comparison shopping can help you secure a favorable rate and term.
Even if your tiny home builder offers financing, always shop around and compare rates.
You can speak with a mortgage broker, your personal bank, a credit union, as well as online lenders. Aim to get at least three quotes from different lenders.
A tiny home gives you the freedom to live the life you desire.
You’re able to simplify and save money, but getting financing to buy a tiny house isn’t the same as getting a standard mortgage.
It’s important to understand your options, and then choose a loan that best suits your circumstances.