Getting Financing for a Tiny House
Tiny houses show every sign of becoming the next big thing. Unfortunately, they also present some big challenges - such as how to obtain financing.
Unfortunately, it's very difficult to get a mortgage for a tiny house - at least presently. However, there are a number of other financing options available that you can use to either buy or build your own tiny home - and the demand is rising.
"It's sort of become somewhat of a phenomenon in the last 6-12 months," said Todd Nelson, a business officer with Lightstream, the online consumer lending division of SunTrust Bank. "It's something I hadn't heard of a year ago and now we're getting dozens of inquiries a week for these things."
Tiny houses, if you're not familiar with the trend, are exactly what they sound like. They fit an entire living space - bed, bathroom, kitchen and living room/sitting area - into a footprint that's often no larger than that of a storage shed. There's no fixed definition, but a commonly used standard is a dwelling of no more than 400 square feet.
The designs are often quite creative and stylish, like something out of a fairy tale. Naturally, they make highly efficient use of space and commonly offer features such as lofts, foldout beds, and the like.
For some, the interest in tiny houses is driven by a desire to live more simply and affordably, and not be weighed down with all the stuff that inevitably accumulates in a larger home. Others see them as an option for a vacation home or even as a stylish camper - many types are designed to fit on a trailer in order to be towed from site to site.
Can you get a mortgage for a tiny house?
While it's sometimes possible to arrange a mortgage for a tiny house, most of the time the cost is too low to be approved for a mortgage loan, according to Nelson. There are other challenges as well: a mortgage requires that a home be placed on a permanent foundation, and many tiny homes are portable. Even if one is fixed in place, there are still issues with zoning and local codes.
Nelson said some lenders will approve recreational vehicle loans for tiny houses that are designed to sit on a trailer, provided the unit meets RVIA (Recreational Vehicle Industry Association) standards. That applies whether someone buys a pre-built unit from a tiny house builder, or if borrowers construct it themselves on top of a flatbed trailer suitable for the purpose.
Often though, borrowers opt for an unsecured personal loan to purchase or build a tiny house. The rate is higher than on an RV loan, but it allows greater flexibility. Such loans are made solely on the basis of a customer's credit history and ability to repay, without any need to justify how the money will be used. So the borrower doesn't have to get the house or plans approved in order to get the loan.
"It allows you as a consumer to make just about any purchase you want," Nelson said.
Yet another option is a home equity loan, for those who already own a residence and are considering a tiny house as a second property or portable getaway. Home equity loans not only have very low rates, but their repayment terms are commonly longer than for RV or personal loans. And because they're considered a mortgage on your primary residence, the interest you pay is tax-deductible for most borrowers who itemize deductions.
What about deducting interest?
Can you deduct the interest on a personal loan used to buy or build a tiny house, if you're using it as a primary or secondary residence? That question seems to be up in the air.
"As far as we can tell, the answer is no," said Kai Rostcheck, executive director of Tiny House Lending. He describes the company as a "matchmaker" that seeks to help arrange loans for people interested in a tiny house.
While the IRS allows you to deduct the interest on a loan secured by a motor home or even a boat used as a secondary or primary residence, a personal loan used to buy or build a tiny house isn't secured by the property itself. And that's the key, according to IRS Topic 505 - the property must serve as collateral on the loan in order for the interest to be tax-deductible.
Of course, the fact that it's difficult to get a secured loan for a tiny house is a big part of the problem.
"Where we are is in the very early days of tiny homes becoming legitimized," Rostcheck said. "It's been a fringe movement for a long time."
Tax deductibility is one example of that. Tiny houses are still so new that lenders are just beginning to figure out how to classify them and develop standards for approving those loans. Until they do, they aren't going to be willing to use those homes as collateral for a loan.
Zoning, code challenges
Other areas, such as zoning and building codes, remain unsettled as well, Rostcheck said. That not only makes it difficult to qualify those properties for a loan, but affects where they can be located as well, and the rules vary across the nation.
"It's like the Wild West, literally, it changes from town to town," Rostchek said.
For example, most communities won't allow you to live full time in an RV, Rostcheck said, and any dwelling on wheels of less than 400 square feet is classified as RV, according to HUD guidelines. Many won't allow homes on a foundation or permanently sited manufactured homes of less than 800 square feet, while still others have no minimum size requirement for permanently sited homes.
Depending on whether the house will be mobile or permanently sited, there may be different challenges with regard to connecting to utilities or otherwise providing water, sewer and electrical service. Many tiny house owners design their homes to live "off the grid," with solar power and composting toilets, but that can create conflicts with the rules of some RV parks and even states such as Florida, which is actively seeking to discourage off-the-grid living, Rostchek said.
Another obstacle to traditional mortgage lending for tiny homes is obtaining insurance. Homeowner's insurance requires that a unit be placed on a foundation, but the fact many tiny houses are on wheels creates some significant problems.
"How do we give you what is essentially a homeowners' policy knowing it could be moved, meaning we'd have to re-write the policy, and there could be liability issues when moving it?" Rostcheck asked.
He said there's really no existing insurance product out there for tiny homes, although some can be insured under RV policies.
Socioeconomic trends driving demand
"No having easy access to financing has been a huge throttle on the industry" Rostcheck said, but he's confident the industry will eventually get it all worked out, given the size of the potential market.
"We have a woeful lack of affordable housing in this country," Rostcheck said. He notes that according to Census figures, a little over one-third of all households, or 45 million, are renters, paying a median of $1,000 month, for a market total of $45 billion.
By contrast, he said, that same payment could nearly pay for a median-priced tiny house at $36,000 in just about three years, and leave the owner with no rent payments going forward and a bit of equity besides. Even if only 1 percent of renters were to eventually buy tiny homes, he said, that's still a pretty big market.
"I think that's the most compelling reason banks are eventually going to get on board with it" he said.
Lightstream's Nelson agrees.
"I think that Millennials are thinking very differently about home ownership than the previous two generations," he said. He notes that they are looking for more flexibility in their lifestyles, and appreciate the smaller size, lower costs and smaller environment impact that tiny houses offer. There may be interest from baby boomers looking to downsize as well.
For the mobile option, Nelson said a tiny house allows more customization than a standard RV and allows people to get a bit creative as well.
Wave of Home Equity Defaults Coming?
How Refinancing Can Hurt Insurance Rates