Who doesn’t love tiny houses? They’re catchy, intricately designed, and remarkably livable. Costing as little as $30,000, they also represent one of the fastest growing trends in housing. They can be built on a foundation or wheels which makes them versatile, but it also complicates matters when trying to find a place to park them (permanently or temporarily).
Another complicated issue could be choosing how to finance a tiny house.
Tiny houses first came on the scene as early as the 1970’s; however, it was the financial crisis in 2008 that launched the small house movement.
Economics and ecology are the key drivers of the movement, especially for retirees who saw their retirement assets devastated and younger adults having trouble saving for a big down payment.
The smaller footprint of a tiny house is appealing to those who want to do their part to preserve the environment as well.
In fact, it’s become so popular that there is a TV show devoted to the subject entirely.
What Exactly is a Tiny House?
The technical definition of a tiny house is one that is less than 500 square feet. The average size of a tiny house is 186 square feet which is small enough to mount on a trailer. The average cost for materials to build a tiny house comes out to around $25,000. Tiny houses can be built from a kit by do-it-yourselfers for less than $10,000 or they can be built by higher-end tiny house builders for as much as $100,000.
The biggest challenge facing a tiny house owner is where to put it. For a permanent home, there is the problem of finding a plot of land zoned for tiny houses. Cheap land can be purchased, but it usually comes at the cost of being remote with no utilities. There are a number of eco-villages popping up around the country where tiny houses are welcomed. For tiny houses on wheels, the challenge is finding an RV park that will accept them.
Financing a Tiny House
Nearly 75 percent of tiny house owners own them without any debt. Many are purchased in full with cash by homeowners 50 years or older. The rest are people who were able to pay off smaller tiny house loans within a few years. Younger adults typically must find a way to finance them which can also be a challenge. There are very few financial institutions that offer mortgages on tiny houses because of their small size. Most banks have a minimum mortgage requirement. However, because of the relatively small amount of capital required for one, buyers can find other ways for financing a tiny house.
Personal loans are the most common mortgage alternative for financing a tiny house. They are easier to obtain than a mortgage and, depending on the creditworthiness of the buyer, they can be a relatively low cost option. Because they are unsecured loans (relying on creditworthiness instead of collateral), personal loans are more expensive than mortgages with rates as low as 6 percent and as high as 30 percent depending on the lender.
The advantage of a personal loan is that the monthly payment is fixed and the term is short, ranging from one to seven years. Typically, the shorter the term of the loan is, the lower its interest rate. The other advantage of a personal loan is that if you get behind on payments, there is no risk of foreclosure on your home.
To qualify for a tiny house loan, you will need good credit, a steady income and job, and the ability to demonstrate your ability to save. A tiny house loan can be a useful tool for financing your tiny house, but you should really think about the debt obligations that come with such a decision. You’ll have to be setting up or presiding over the construction of a tiny house on top of assuming responsibility of monthly payments.
For tiny homes built on a mobile platform, it’s possible to finance them as a recreational vehicle which can be a better alternative to a personal loan. Because the loan is secured by the “RV,” interest rates are generally lower on RV financing – ranging from 5 percent to 8 percent for a term of seven years after a 10 percent down payment. In order to qualify for an RV loan, a tiny house must be certified by the Recreational Vehicle Industry Association (RVIA) as “roadworthy.” Also, RV loans are not designed for primary residences. To qualify, you may need to be able to name another primary residence.
As the tiny house movement expands, the financing options also expand. Peer-to-peer lending sites, such as TinyHouseLoans.com and Tiny House Lending serve prospective tiny house buyers by matching them with investors and third-party lenders that have an interest in supporting the tiny house movement. The qualifications for a peer-to-peer loan are similar to those for a personal loan.
Tiny house financing is generally not available directly from manufacturers, except those that partner with third party-lenders offering unsecured personal loans. Some manufacturers are taking the step to classify themselves as an RV manufacturer to offer RV financing. Tumbleweed Tiny Houses is one example of a manufacturer who was able to reclassify itself; it now offers RV financing for tiny houses built on wheels that are certified by the RVIA.
While these options can certainly work out for some individuals, they should always be scrutinized to some degree. Since they are not as well-known as other financing solutions, the door is opened for mistakes to be made. You should scrutinize a manufacturing loan offer like any other type of debt, weighing it against other viable solutions.
The best option for financing a tiny house depends on your credit standing, savings, income, and where and how you plan to live in it. Before considering which type of financing to pursue, it is important to clearly define your vision for tiny house living and do your research.
*Payment example: Monthly payments for a $10,000 loan at 9.34% APR with a term of 3 years would result in 36 monthly payments of $319.58. LightStream disclosures here.
Author: Jeff Gitlen
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