Tiny-house financing: Can you get a mortgage for a tiny home?
- RV loans are an option, but the tiny house must be RVIA certified.
- Personal loans can work, but unsecured loans have higher interest rates.
- Portfolio loans can be used for tiny homes built on permanent foundations.
- Be aware that building codes or zoning regulations may prohibit tiny houses.
But if you’re eyeing tiny houses for sale, there’s one likely complication: Figuring out how to finance your tiny-house purchase. Tiny-house lending is different from lending for typical single-family houses, but it is possible to get a loan for your tiny house if you know what you’re looking for.
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What is a tiny house?
Tiny houses — also known as tiny homes — come in many varieties. Although there is no set definition of tiny houses, they are generally regarded as homes less than 500 square feet in size.
Tiny houses are often built on top of wheeled trailers, making them portable. But they also can be built on permanent foundations. Tiny houses tend to be more affordable than larger, single-family homes, but the cost can vary widely. Some people build their own tiny houses for as little as $10,000, while others may pay more than $100,000 for larger, custom-built homes equipped with premium furnishings.
Brady Sherman and Abby Nelson co-founded MicroMansions, a company working to bring a luxury tiny-house community to Wichita, Kansas. Sherman said part of the appeal of tiny houses is that they simplify the lives of their owners. Both Sherman and Nelson grew up in families where possessions tended to be saved for a rainy day, but as they grew older, they moved away from that mindset, he said.
“[Abby] said, ‘I think it would just be fun to have less stuff and travel more.’ And I was like, ‘I think other people would like that too,’” Sherman said. “We think other people our age, and even older, want to do more things instead of have more things.”
RV and personal loans
Tiny homes typically cost much less than a typical single-family residence, so they don’t usually fall within the minimum loan amount for mortgages, said Julie Olian, vice president of LightStream, the online consumer lending division of SunTrust Bank.
“It’s … kind of a new category, so I’m not sure that banks necessarily know how to handle the financing on them,” she said of tiny houses.
But LightStream is an exception, having designed a loan specifically for the purchase of tiny homes. Although it’s underwritten much like an RV loan, LightStream sees tiny houses as its own category, Olian said. The bank’s tiny homes are unsecured, more akin to a personal loan than a typical mortgage in which the house serves as collateral that can be seized if the borrower defaults on the loan. Because the loan is unsecured, the bank places a greater emphasis on the borrower’s credit history and assets, Olian said.
In fact, taking out an unsecured personal loan is one way that tiny-house lovers purchase their dream homes. Unsecured loans can be used for virtually any purpose, but the downside is that because they aren’t secured by collateral, these loans often come with higher interest rates.
Some banks’ RV loans may be used to finance a tiny-home purchase, but typically the tiny house must conform to the guidelines of the Recreational Vehicle Industry Association (RVIA) to qualify. Many tiny-house builders are getting their houses RVIA certified to make it easier for their customers to find financing.
Generally, tiny houses on wheels aren’t eligible for a traditional mortgage, but tiny homes built on a permanent foundation may be. The catch: You have to find what’s called a portfolio lender — a lender that keeps the loan in-house rather than selling it on the secondary market.
The problem, explains Sherman, of MicroMansions, is that to meet the requirements for conventional financing, appraisers need comparable home sales to adequately valuate a property — a fact Sherman discovered when looking for lenders that his clients could use to finance his company’s tiny houses.
“Since there are no other houses like it at scale, especially in the Midwest, they can’t do it because there’s no comparables,” Sherman said. “The footprint is just a little too small.”
The initial reactions from lenders were all the same, Sherman said. At the first mention of “tiny houses,” they’d say, “Nope! We don’t do that.” It was only after explaining that the homes were built on permanent foundations that some lenders began to warm up to the idea. The company has since found a few portfolio lenders in the Wichita area interested in financing the homes, but it took some work to combat lenders’ preconceived notions of tiny houses, Sherman said.
“There’s a lot of stigma around conventional 100-square-foot tiny homes and these (MicroMansion tiny homes) kind of have to change their perception on that,” he said.
Financing isn’t the only challenge to the tiny-house lifestyle. Building codes and zoning ordinances in many parts of the country weren’t drafted with tiny houses in mind. Although some cities have embraced tiny houses — such as Fresno, California and Spur, Texas — others have clashed with tiny-house owners who have built their homes in defiance of local laws.
A Lansing, Kansas woman, for example, was told by the city that her tiny home violated zoning regulations because the property was zoned for single-family homes, not two homes. She may not be allowed to live there unless she purchases half the lot from her daughter.
If the popularity of tiny homes continues, however, local governments may face greater pressure to change local laws to accommodate them. Certainly, the growing popularity has forced at least some lenders to pay attention; Olian said her company has seen increasing demand for its tiny-house loan.
“LightStream has seen an uptick in tiny-house applications over time and certainly the television programs that cover them … not only help build the category, but keep the interest strong as an alternative for people looking to downsize, or whose lifestyle is such that they may not be living in one place for a particular time,” she said. “It’s appealing to them to take their home with them as they go.”