How Do Tiny Home Loans Work?

Homeownership is still part of the American Dream for 72% of Americans, according to Trulia. But with many Millennials leaving college with crushing student loan debt, owning a house comes off as more of a pipe dream than the American Dream.

Percentage of Americans who are homeowners

That may explain why tiny homes are becoming more popular among young people. Television shows like “Tiny House, Big Living,” “Tiny House Hunters,” and “Tiny House Nation” have emboldened people to begin looking at new ways to realize their dream of homeownership without committing to decades of mortgage payments.

Why tiny homes?

“Tiny homes offer a smaller footprint alternative for consumers looking to downsize or have a second home, perhaps as a vacation property,” says Todd Nelson, business development officer of Lightstream, an online lender. Other uses, Nelson notes, include using a tiny house as a guest home, a place for aging parents to live on a family member’s property, or for people who travel frequently for work.

Depending on where you plan to build your tiny house, paying cash may be your best option. But tiny homes can cost as much as $100,000, so you may need some help. Before you start looking at tiny homes, look into whether you can qualify for a loan to help you cover the cost.

Tiny home loans

Loans specifically meant for tiny houses aren’t common, but a few lenders offer them. Unlike regular mortgages, they typically don’t require a lengthy approval process. That said, their repayment terms are much shorter than a mortgage.

For example, Lightstream offers unsecured tiny home loan amounts from $5,000 to $100,000 with Annual Percentage Rates (APR) as low as 3.24%. There’s no down payment requirement and no fees or prepayment penalties. Repayment terms range from 24 to 84 months. The lender boasts that you may receive your funds as soon as the day you apply.

“We’re not really underwriting the collateral,” says Nelson. He adds, “We’re underwriting the consumer. We can make a decision much faster because it’s not predicated on what they’re buying.”

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Like most loans, to qualify for a Lightstream tiny home loan, you typically need the following:

  • An established credit history with a variety of accounts
  • Good payment history
  • A history of good saving habits

Other borrowing options

Depending on your needs and preferences, there are several other options to help you finance your tiny home loan.

Mortgage

Most tiny homes are built on a trailer with wheels, but, if you plan to build yours on a permanent foundation, a regular mortgage may be an option. Going this route can give you a long repayment period, a low interest rate, and tax-deductible interest payments.

Start by checking with your local credit union, but keep in mind that some lenders have minimum loan amounts for mortgages. With an average tiny house price tag of around $25,000, you may not meet that minimum.

RV loan

Depending on the state you live in, your tiny home may be considered a recreational vehicle. Because RV loans are secured by the tiny home as collateral, you can usually qualify for interest rates of 10% or below. The lender may, however, require a 10% to 20% down payment (and, remember, the larger the down payment, the lower the interest rate).

To qualify for an RV loan, your home would need to be certified by the Recreation Vehicle Industry Association (RVIA). The RVIA has specific safety and manufacturing requirements to prove that your home could get around on the road.

That’s not all, though. The S.A.F.E. Mortgage Licensing Act of 2008 can make it difficult for banks to escrow property taxes on a recreational vehicle if it’s your primary residence. Because of this, banks may be unwilling to work with you.

Manufacturer financing

Tiny home builders often have financing options for buyers. Check with yours to see what kind of rates and repayment terms they offer. Depending on the features in your tiny home, you may qualify for better terms.

Personal loan

If you want an easy loan process and plan to pay back the debt quickly, a personal loan may be a good option. Personal loans are usually unsecured, meaning you don’t have to put up your tiny house as collateral. And while the lender may ask you how you intend to use the funds, they won’t require your tiny house to meet any specifications.

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The drawback to personal loans is that their interest rates can be higher and you may have a short repayment period. Consider this option only if you can afford those.

Which loan should you choose?

If you want to work with someone who knows the ins and outs of tiny houses, working with a lender that offers tiny home loans is your best option. And if you have great credit, lenders like Lightstream offer solid interest rates and repayment terms.

Getting a mortgage on a tiny home can be difficult. With the most hoops through which to jump, this option only makes sense if your tiny home meets the requirements and you want the lowest monthly payments and the longest repayment period (up to 15 or 30 years).

An RV loan can also be a hassle because it includes the RVIA requirements and lender selection may be limited. Compared with a mortgage, however, this option is more flexible.

Setting up payments with the tiny house manufacturer may sound like the simplest solution, but it’s hard to say what your terms would be, as they would differ by manufacturer. Before you opt for manufacturer financing, shop around to compare rates.

If you don’t qualify for a tiny home loan or want an unsecured loan, a personal loan is worth considering. Just keep in mind that interest rates may be high, so you’ll want to work toward paying off the loan as quickly as possible.

How to lower your tiny home costs

As you’re researching different ways to finance your tiny house, look into ways to decrease unnecessary expenses along the way.

Do it yourself

If you have building experience or are willing to take the time to learn, building your own home can drastically cut your costs. That’s because you’re only paying for the materials; no labor costs are involved unless you hire some help for more difficult parts of the process.

According to Pad Tiny Houses, this route would cost you roughly $30,000 to $40,000, whereas working with a reputable tiny house manufacturer could run you $50,000 to $75,000 for a base model.

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Don’t go crazy with the options

Basic tiny houses don’t come with a lot of frills, so the builder may offer a multitude of additions and improvements to better customize your new home. Before you make your choices, take a step back and consider your priorities.

“Having a budget upfront is critical to making sure you stay on target and avoid spending more money than you intended to or what you can afford to,” says Nelson.

For example, there may be some things you can add later on by yourself. There may also be a few things that are non-negotiable. Go line by line and determine whether it’s truly worth the added cost.

Shop around for a builder

More established and reputable tiny house manufacturers may charge you more for their expertise. On the other hand, finding a local contractor who is looking to get into the tiny house market may charge you less as he may make some first-time mistakes.

“Do your homework,” says Nelson. “Look at multiple bids from builders and different packages.” Go with a builder you feel comfortable with, but make sure you compare a handful to find a cheaper option.

Next steps

Before you start the building process, start looking for financing for your tiny house. First, consider a tiny home lender like Lightstream. But also check out mortgage loans, personal loans, and other options to make sure you’re getting the best deal.

With some personal loans, you can even see what rates you may qualify for without hurting your credit score. Check out SuperMoney’s preapproval tool to review your options.

Whatever option you choose to finance your tiny house, make sure you research more than just the interest rate. Repayment periods, fees, prepayment penalties, and down payment requirements are all features that can impact you financially.

Personal Loans for Good Credit

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Variable:
4.99% – 11.14% APR (with AutoPay)
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