Loans for Tiny Homes
I think this is a very unclear topic so I decided to share my experience and knowledge about how tiny homes are financed. Obtaining a loan for these smaller houses is a very different world and is not the same as financing a regular home. I want to discuss a few important things that should be considered before you buy or build a tiny house. First there are tiny homes on wheels, then you have tiny houses built on a permanent foundation. Financing options are different for these.
Financing for a tiny home on wheels
To my knowledge, you cannot get a standard mortgage for these. The only finance options I’ve seen is trailer and recreational vehicle financing. The length of financing is usually between 24 and 84 months and interest rates can vary from the low 5% range to over 10%, pending credit, down payment, auto payment and income. The banks see tiny home lending as a higher risk since their collateral may not be easy to locate if repossession is needed. They also require 10-20% down payment in most cases to mitigate their risk. So, if you are looking into finance options, keep in mind that you may have a high payment for the next 7 years. The challenge in trying to obtain an RV loan, your tiny house must be certified by the Recreational Vehicle Industry Association to see if it will meet manufacturing and safety requirements. If you are buying your tiny home on wheels from a builder or dealer, they will more than likely have the best tiny home lenders available for you.
Here is an example…
- Tiny home purchase price $50,000
- Down payment of $10,000
- Finance amount of $40,000
- 8% interest rate
- Monthly Payment is $600-$700 (pending credit profile)
Financing for a site-built tiny home
I’ve learned that these are not very common and most banks dont even know how to classify a 400 sq’ home. So, many of them are requiring larger down payments ranging from 20-40%. I’ve also learned that if there are no sold comps of smaller homes in the area, then they will really give you a hard time, especially if they dont have a standard “tiny home lending plan”. Interest rates hover around the 6-8% range but may be lower if your lending can find comps and if your land is paid off. Some may be even to classify your loan as conventional which means you can get a very low interest rate. I recommend asking your lender or bank if they have done a tiny home loan before, and if not, who can they recommend. In my case, i’m using my land as collateral and wont need to supply much cash up front because I have plenty of equity remaining.
Here is an example…
Tiny home build price $50,000
Down payment $10,000
Finance amount $40,000
6% interest rate
Monthly Payment is $400-$500
If you are wanting to use your land as equity, then you may also consider throwing in your property and utility improvements also. It is a much easier process if you have a single loan for everything and are able to have a turn-key home with running water and electricity that you own. Some banks will also offer a construction loan, if there is an appraised value that will cover the home and land. I would recommend looking on Zillow to see if there have been closings on homes that are similar in size as to what you will build. If there are, you can use this as a negotiating factor to convince your banker to lend you the money. Also, if you are able to contact an appraiser, ask what their guestimated value would be for your sized home on land. They will give you an “off the record” estimate but at least you will know up front.
Regardless of which home you want to buy or build, start with the bank that you have the best relationship with. Ask them if they will finance your new tiny home, and if not, who they would recommend. If they will offer you a loan, or even a personalized loan, the interest rate will likely be lower or at least the lending process may be simple since they have your money at their bank anyway.
In the past few years, there has been a huge increase in lending options on a personal basis. These personal loans are often based on your credit and less on your income or collateral. Interest rates can range from 6% to 10% and in some cases can be fairly easy to apply for. Some personal lenders have an easy online application process and will even let you know within 24 hours if you have been approved or not. Some will loan you small amounts of $5,000 and others will lend over $50,000. If you have good credit, your personal loan options will be more available than those with poor credit.
I would recommend waiting until you have at least 20% down to purchase a tiny house, even if you are able to qualify for a smaller down payment. The reason is reducing your risk. In some areas, tiny homes can lose value fast and don’t sell as well since it is a relatively new industry. In the even that you would need to sell in a hurry, it’s a good idea to have a sufficient amount of equity as a cushion.
Insurance for Tiny Homes
There are a few numbers that have been thrown out there recently in regards to insurance coverage. The most common range is $500-700 per year, but the actual number can be affected by the size, value and location of the home. Also, insurance premiums can be determined by the appliances of the house, especially if you have gas versus electric. It is important to get quotes from companies that will insure an RV, in addition to companies that insure site built homes that are not of the norm.