Can you finance a tiny home?

Financing your tiny home purchase

Tiny home financing is a new and growing segment of the real estate marketplace, but it’s proving more challenging for buyers than if they were looking for a traditional mortgage.

If you’re looking for a mortgage for a tiny house, you’ll need to be creative and resourceful, but that doesn’t mean you can’t come up with the dollars you need. Here’s where to look.

Tiny home finance gains acceptance

We live in a world where most things are standardized. Milk is sold by the quart, plumbers get paid by the hour, and such things as single-family homes, townhouses, condo apartments, and properties with two-to-four units are financed and refinanced in huge numbers each year. In the housing mix we now have tiny houses, an ownership movement which has only emerged in the past few years.

Because tiny houses are new, different and small, lenders are not likely to be familiar with them. But this situation is now changing because the market for such properties is increasingly accepted.

You cannot occupy a structure without a Certificate of Occupancy. Until recently such certificates were entirely unavailable for small homes.

As evidence take a look at your local housing codes. In most cases, you cannot occupy a structure without a Certificate of Occupancy. Until recently such certificates were entirely unavailable for small homes. Now, however, the folks who write the rules, the International Code Council (ICC), has added small homes to International Residential Code (IRC). The result is that local governments are more open to tiny house approvals and the occupancy certificates they require.

Tiny home finance applicants are attractive to some lenders

Mortgage lenders love to meet eligible borrowers.

Those who prefer tiny houses tend to have enviable finances. According to the Tiny House Society, 60% of tiny house owners have no credit card debt and most — 55% – have bigger savings accounts than the typical homeowner. If you’re a mortgage lender you have to love these numbers.

Mortgage barriers

Tiny house buyers are often faced with four big hurdles.

1. Lenders don’t love small loans

Mortgage lenders need to make money. There’s less profit in mortgage originations than borrowers might think. According to the Mortgage Bankers Association, the typical mortgage in 2018 generated a lender profit of $367 versus $711 per loan in 2017.

Lenders are usually paid on the basis of loan size.

Lenders are usually paid on the basis of loan size, the bigger the loan the bigger the fees and charges. As a result, lenders prefer to work with big loans, financing certain to cover their fixed costs. Small mortgages – the type naturally associated with tiny houses – only make sense for lenders if they can charge higher fees. You might pay higher fees or get a higher mortgage rate on a tiny home than on a traditional house.

2. Community home size requirements

Many communities have minimum home size requirements, rules left over from the days of grand estates and pompous notions of real estate grandeur. Unfortunately, where such rules exist – and they exist widely – small homes are not up to code unless the codes are changed.

3. Traditional mortgages require permanent foundations

Mortgages are secured by real estate; that is, ground. Public records show exactly where a property is located. Many tiny homes are on wheels. The ground beneath them may not be owned by the homeowner. Tiny houses with wheels can move, whatever ground is beneath them can change. Such homes cannot be financed with a traditional mortgage.

4. Square footage minimums for traditional mortgages

Perhaps the biggest hurdle of all will be square footage minimums imposed by the lending agency (i.e. FHA) or the lender itself. Often, the rulemaking agency such as FHA or Fannie Mae will allow a certain property but the lender won’t. The lender can add rules at its own discretion. For more about square footage, see section “Traditional mortgages" below.

Tiny house financing options

While attitudes and acceptance are changing tiny houses remain outside the realm of traditional mortgage lending. No matter, such houses can be financed. Here’s how.

Traditional mortgages

There are situations where it is possible to get financing through the FHA, VA, and conventional mortgage programs. In particular, it may also be possible to get financing from a “portfolio” lender – a lender that services the loans after closing instead of selling it off, as most mortgage lenders do.

Square footage requirements

Be sure to look at the minimum square footage for each loan type, and whether your lender adheres to this minimum or has its own higher minimum.

Following are square foot minimums by loan type.

FHA: 400 square feet

VA loans: No square footage minimum

Conventional loans: From Fannie Mae guidelines: “Fannie Mae does not specify minimum size or living area requirements for properties with the exception of manufactured housing (Editors note: 600 square feet for manufactured homes). There should be comparables of similar size to the subject property to support the general acceptability of a particular property type.”

Portfolio loans: Lenders make their own rules for portfolio / non-standard loans. Check with the lender.

A HUGE caveat on square footage: Even though there's no stated square footage minimum from some agencies, they all require "comparable sales" or "comps" in the same area to arrive at a value for the tiny home. So if your tiny home purchase is the only one in the region, you will have a very hard time getting approved. The lender and appraiser need to see that there are similar homes selling in the area.

Beyond square footage requirements, to get approved, you will need a tiny home on land that you own which meets all zoning and building requirements. The required loan amount will likely be above $100,000. That’s a number that can work when financing both a property purchase and the cost of the improvements – in this case the tiny house. At 4.25 percent a $100,000 mortgage will have a monthly cost for principal and interest of $491 over 30 years, a sum which is far, far less than either the typical rental or mortgage payment. Insurance and property taxes are extra.

For details and specifics show around and speak with lenders who offer an array of mortgage products.

Non-traditional lending

Personal loans

With good credit you can get a personal loan from a commercial lender. This is unsecured financing, meaning the tiny home isn’t collateral for the loan.

However, because there’s no collateral, there’s more risk for the lender and higher rates for you. Make sure you are comfortable with the interest rate you’re paying, which could be much higher than you were expecting for a traditional mortgage.

Builders

If you are purchasing a tiny home then the builder may be able to either offer financing or recommend sources.

FHA Title 1 financing

The FHA Title 1 program insures financing up to $25,000 for a manufactured home that qualifies as real property. It also insures up to $7,500 in unsecured financing. Title 1 financing can work for a borrower who has a tiny home, without wheels, on a property owned by the borrower. The home must meet local zoning and building standards.

Savings

A tiny home – especially if home-built – can be very inexpensive. Less than a car in many cases. Because of limited cost it may be possible to finance a tiny house from savings. In many cases, buying a tiny home is more affordable than coming up with a down payment on a traditional home.

HELOCs

If you have an existing home with sufficient equity you can get a home equity line of credit (HELOC) to finance a tiny home. However, a HELOC is designed to be secured by a prime residence which means, effectively, you can’t get a home equity line of credit and then simply move. A HELOC might be attractive when a tiny home will be a vacation property or second home.

Friends and family

Kickstarter, anyone?

While you may not be able to get strangers on Kickstarter to sponsor your tiny home purchase, you may be able to get a personal loan from a family member or friend. If you elect to get financing from a source other than a commercial lender make sure the loan agreement is in writing and approved by an attorney.

RV financing

If a tiny home is on wheels you might consider RV financing. This is possible but only if the home meets required RV standards.

How will you buy your tiny home?

Tiny homes are well worth the extra effort of finding financing. They supply a simpler, more affordable lifestyle that more and more people are seeking.

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