Buying a tiny house is a huge undertaking – particularly from a financing perspective.
Tiny house hunters are typically looking for homes that range from 100 to 500 square feet. Many of these home buyers are millennials, who don’t want the hassle of maintaining a large house, says Matt Parker, a real estate agent in Seattle and author of “Real Estate Smart: The New Home Buying Guide.”
“Owning a large home on a large plot of land is a relic of the American dream,” Parker says.
TV shows like FYI’s “Tiny House Nation” and HGTV’s “Tiny House Hunters” have helped the movement gain traction.
However, these programs don’t delve into the process of procuring a loan for a tiny home, says Todd Nelson, business development officer at LightStream, a lending division of SunTrust Bank that offers loans for tiny-home buyers.
“Many tiny homes are uniquely built and don’t conform to the mortgage requirements for a traditional house,” says Nelson.
If you’re looking to buy or build a tiny home but don’t have enough cash on hand to foot the whole bill, here’s what you need to do to successfully finance your purchase.
Opt for a home on wheels
Tiny homes are frequently purchased using recreational vehicle (RV) loans, which are unsecured, fixed-rate mortgages that typically have two- to seven-year payoff plans. Generally, these loans have no application fees or closing costs.
“It’s a straight installment loan,” explains Nelson, who says that borrowers usually need a FICO score of at least 670 to qualify.
However, RV loans typically have higher interest rates than traditional home loans (LightStream’s loans start at 2.99 percent but go up to 9.94 percent), are often capped at a $100,000 maximum, and – unlike traditional mortgages – are not tax deductible.
Find a mortgage lender that specializes in tiny home loans
Although the tiny home movement is gaining speed, it’s still a relatively niche market.
“You don’t see a ton of appetite among traditional mortgage lenders” to offer loans for tiny homes, says Nelson, since many mortgage lenders have minimum loan amounts that are above $100,000 and only offer mortgages for homes on permanent foundations.
Thus, you want to work with a lender that focuses on tiny home loans.
Be mindful of zoning laws
When you’re buying land, you need to first make sure there are no restrictions on what type of structures you are allowed to build, advises Ryan Mitchell, owner of a 150-square-foot home and founder of The Tiny Life, an online resource for tiny home buyers.
This involves looking at local, county, and state zoning laws. Some zoning regulations give minimums for lot size and square footage of houses, as well as restrictions on how many residences can occupy a lot or given area.
The American Tiny House Association offers a comprehensive list of state-by-state regulations.
“If a parcel of land doesn’t meet all of the zoning requirements, we can’t approve the loan,” says Nelson. Knowing where you can – and can’t – build your tiny home is crucial.
Factor in all of the costs
Costs can vary significantly for tiny homes, so before you apply for a RV loan, you should analyze your budget. Tiny House Community provides a useful spreadsheet you can use to calculate the various expenses you’ll incur.
Some good news: if you’re using an RV loan to build a tiny home, you have a lot of financial freedom in terms of how you choose to spend the money.
In addition to using the cash to buy a parcel of land and pay for construction costs (including building materials and labor), you can put the money toward home furniture, landscaping, and solar paneling.
Moreover, as with any home purchase, you need to consider ongoing maintenance costs once you’re living in the home. (Yes, even homes with smaller footprints require routine upkeep.)
One cost to budget for: Many tiny houses have stained siding that requires re-staining every two to three years.
Consider your time horizon
Determining your best financing option will depend on your life plans. If you’re willing to stay in your current home for a few more years, it might make sense to wait until you’ve built enough savings to buy a tiny home with all cash.
In fact, 68 percent of tiny homeowners have no mortgage, compared to 29 percent of all U.S. homeowners, according to research compiled by The Tiny Life.
Want expert advice? Meet with a fee-only financial planner to assess your finances and your goals. You can find one through the National Association of Personal Financial Advisors.
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