Fans of the “Tiny House Movement” have long dreamed of ditching most of their extra rooms, couches, bookshelves and tables and moving into a tiny home. Maybe you’ve thought about it…or know someone who has. This vision of the ultimate downsize is about living simply in a small home—often with around 500 square feet of living space.
But living the simple life can get complicated if you need to take out a mortgage loan to finance the purchase of a tiny home. Tiny homes are small, but they’re not free. They might cost $50,000 or more to buy, withTheTinyLife.com blog saying that the average cost to build a tiny house is $46,000 nationwide when they are built by professional builders (land additional).
Here’s the rub. Some banks won’t originate mortgage loans for $50,000 or less. These lenders simply won’t make enough money on such small loans to make originating one worth their time.
What to do if you’re ready to join the tiny-house movement? Here are three financing options.
Home Equity Loan: If you’re building a tiny home as the occasional retreat from your primary home, you might be able to take out a home equity loan to finance the purchase of your tiny second home.
To do this, of course, you’ll need a primary home, and you’ll need to have equity in that home. Say you owe $126,000 on your mortgage loan and your primary home is worth $220,000. You have $94,000 worth of equity in your primary residence ($220,000â€“$126,000 = $94,000). Lenders will lend you a certain percentage of that equity—it varies by financial institution—that you can then use to pay for your tiny home. For instance, your lender might, if you have equity of $94,000, approve you for a home equity loan of $50,000—leaving $44,000 home equity or loan-to-value of 80% ($126,000 + $50,000 V $220,000 = 80% LTV).
Recreational Vehicle Loan: If you don’t already own a home and if you want your tiny home to be your only residence—and not just a cozy vacation home—then you’ll have to go another route. You might turn to an RV loan to finance your tiny home.
To do this, you must first make sure that your tiny home actually qualifies as an RV (recreational vehicle). Usually, this means that your tiny home is mobile. It also means that your tiny home must be certified as an RV by the Recreation Vehicle Industry Association.
The good news? The makers of tiny homes are increasingly certifying their homes as RVs to make it easier for consumers to finance the purchase.
Unsecured Loan: A final option is to turn to an unsecured personal loan as a way to finance a tiny home.
As its name suggests, an unsecured loan is one in which a property is not used as collateral. That’s the big difference between an unsecured loan and a standard mortgage loan. The home you are financing is used as collateral in a mortgage loan. If you miss enough mortgage payments, your lender can take possession of your home.
In an unsecured loan, lenders don’t have that opportunity. Because of this, these loans are riskier for financial institutions. Often, banks and lenders will charge higher interest rates on such loans because of this.
To qualify for an unsecured loan, you’ll need many of the same positive financial attributes that you’d bring to a lender when applying for a traditional mortgage loan: a high credit score, low debts and steady stream of monthly income. Whatever your plans, call us first. We’ll help you determine exactly what you can afford before you sign anything.