Many Americans are finding tiny houses, or those that measure several hundred square feet in size, are a welcome way to live. They can be both economical and eco-friendly, and some people say they simplify life, which can bring many benefits.
If you’re curious about tiny houses or are currently contemplating one, it’s important to know that financing these dwellings may be different than securing a traditional mortgage. Here’s a guide to tiny houses and how to secure funds to buy or build one.
What Is a Tiny House?
A tiny house is often defined as a home that is between 100 and 400 square feet. In contrast, the median size of a single-family American home is currently 2,014 square feet. That’s five times bigger than the biggest tiny home. Here are some other facts to know about this kind of dwelling.
• Owners live in their tiny homes themselves, rent them out, use them as a small vacation home or even build them as an accessory dwelling unit (ADU) on the same lot as their primary residence. Tiny homes may be on wheels, or they may sit on a fixed foundation.
• Prefab homes can be delivered complete to the site, or there are modular homes that require some assembly on site. Those who would rather build their own house can hire an architect or draw up plans to their own specifications. There are small homes in all kinds of styles, from a classic Colonial or Victorian to a ranch style or A-frame or ultra-modern design.
• Local zoning rules will determine whether or not a person can build or move into a tiny home. And building codes will determine things like ceiling height.
• Tiny houses may not have good resale value since they are such a specific type of home and are often highly customized. Before buying a tiny house as an investment property, it might be wise to consult a real estate investment professional.
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Tiny House Pricing
In 2023, the average sales price for a single-family home was about $430,300. Tiny homes cost quite a bit less, with an average of $45,000. That price can vary up and down depending on the size of the home, materials used, and amenities (yes, some tiny homes have luxe, spa-style bathrooms, for example). The price of the building is not the only thing to consider.
Buyers of tiny homes must factor in the price of buying or leasing land on which to place the home if they don’t already own it, as well as the cost of hooking it up to utilities.
If the tiny home is on a foundation, there may be state and local property taxes to pay. If the tiny house is on wheels, though, there likely won’t be property tax assessed.
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Financing the Land
If property needs to be purchased to have a place to put a tiny home, an option for financing is a land loan. There are three types of land loans: raw land loans, unimproved land loans, and improved loans.
• Raw land loans are for land that’s completely undeveloped with no electricity, roads, or sewer access.
• Unimproved land loans are for properties that have more access to amenities like utilities, but lack utility meters.
• Improved land loans are for land with access to roads, water, and electricity.
The size of the down payment and the interest rate of the loan will depend on what type of loan is needed. For example, lenders may consider raw land to be a riskier option than improved land and require a bigger down payment and higher interest rates.
Mortgages for Tiny Homes
Qualifying for a home loan for a tiny home may be tricky. Some lenders may not be willing to offer first or second mortgages for tiny home financing. However, if a tiny home has a foundation and complies with local building codes, it may qualify for certain mortgages.
Tiny homes may also qualify for what is known as a “chattel mortgage,” a mortgage for moveable personal property. The tiny home acts as security for the loan, and the lender effectively becomes the owner of the tiny home until the loan is paid off and ownership is transferred back to the borrower.
This differs from traditional mortgages that are secured by a lien on the property. Because the size of the loans are typically small, chattel mortgages may have relatively short terms, though interest rates may be relatively high.
Personal Loans
A personal loan can allow individuals access to money that they can use for any personal, family, or household purpose, from paying off credit cards to an effective tiny house loan. Depending on the lender, loan amounts can range from a few thousand dollars to $100,000. When the applicant is approved for a personal loan, they’ll receive the loan amount in a lump sum and pay it back in installments with interest.
Personal loans may be secured or unsecured. Unsecured loans are not backed with any collateral, and the interest rates currently range from about 6% to 36%, depending largely on the borrower’s credit score.
Secured loans are backed by collateral, such as personal savings, a car, or another home owned by the same borrower. They typically come with a lower interest rate than their unsecured counterparts. However, it’s important to note that if a personal loan is defaulted on, the borrower’s assets could be seized by the lender to repay the debt.
Home Equity Loans
The equity someone may have built up in a home they already own can be tapped to finance a tiny home for use as a vacation home, rental property, or ADU. A home equity loan is a fixed amount of money secured by a borrower’s home.
Usually, up to 85% of the equity accumulated in a home can be borrowed, though actual loan amounts will also depend on the applicant’s income and credit history. The home equity loan is repaid with monthly payments over a fixed term. And if the borrower fails to repay, the lender can foreclose on the house.
A home equity line of credit (HELOC) may be another option to finance a tiny home. HELOCs differ from home equity loans in that the borrower doesn’t receive a single lump-sum payment from the lender.
Rather, a HELOC gives the borrower access to a line of credit that can be drawn down, paid back, and drawn down again, if need be, within a certain time period. The HELOC is secured by the borrower’s home, so as with a home equity loan if the debt is not paid, the lender can use the home as collateral.
Loans From Tiny House Builders
A tiny house builder or contractor may be able to help secure financing through unsecured loans based on an applicant’s credit score, or secured loans backed by the value of the tiny home. These tiny-house loans may have longer terms and lower starting interest rates than personal loans, but they may require a downpayment.
RV Loans
If the tiny house has wheels and is certified as an RV by the Recreational Vehicle Industry Association, an RV loan may be another option for financing. Online lenders, banks, and credit unions may all offer RV loans. In many cases, the tiny house will serve as collateral for the loan, the same way a car would serve as collateral in an automobile loan.
Recommended: Guide to Buying, Selling, and Updating Your Home
The Takeaway
If you’re in the market for a tiny house, you may need to think beyond traditional mortgages. Home equity, HELOC, and personal loans, among other options, may be available forms of financing that can set you on your way to owning the tiny house of your dreams.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
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