How to get financing for a small house

Tiny homes are quart-sized dwellings, mostly between 100 and 400 square feet, built for simpler living and smaller budgets. However, financing a small home can get tricky.



young woman sitting in front of her little house


© (Getty Images)
young woman sitting in front of her little house

You may have a hard time finding a traditional mortgage, forcing you to look for alternative financing options. This is because mortgage lenders have minimum loan amounts and offer loans only for homes on permanent foundations. Small homes, however, generally cost less than mortgage minimums and are often built on movable frames.

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Depending on the situation, you may be looking for a home equity loan or line of credit, a recreational vehicle loan, or a personal loan. Choose wisely. Each financing option for the construction or purchase of a Tiny House has advantages and disadvantages.

Why tiny houses are popular now

Small homes started to gain traction a few years ago, but since the onset of the coronavirus pandemic, they are gaining more attention, either as a place to live or as an office for remote working.

According to a 2020 survey by IPX 1031, a Fidelity subsidiary, 56% of those surveyed said they would live in a small house, mainly for affordability reasons but also because the houses are efficient, environmentally friendly and mobile. .

Additionally, 62% of remote workers surveyed considered purchasing a small house to serve as a backyard office.

What you need to know about small houses

There are two types of mini-houses: a house on wheels, which could be considered an RV, and a house built on a permanent foundation.

Prices vary as widely as house styles. An average tiny house costs between $ 10,000 and $ 30,000 if you build it yourself, according to the tiny house blog The Tiny Life. The costs double if you hire a builder. The price can depend on how many bells and whistles you add and can even go up to six digits.

If you are considering installing a mini-house on your property, says Matthew Davies, founder and CEO of property management company Harmony Communities, “your first step would be to go to your local building department, whether it’s for the building. county or city, and know the zoning bylaws.

What are your financing options for small homes?

Small home loan choices can be limited. You may need to consider several financing options to make sure you get the cash you need. Here are some possibilities:

Mortgages

You may have a hard time finding information online about mortgage lenders who will work with small home buyers. “If someone builds a small house on a foundation, in accordance with all the local building codes and requirements and requirements, it might be possible to get a mortgage,” says Joe Toms, president and chief investment officer at FreedomPlus. , a personal lender.

Even so, a small residential mortgage, sometimes referred to as a chattel mortgage (mortgage on personal property), may have a shorter repayment term because the loan amount is much smaller than usual. You may also end up with a slightly higher interest rate because small loans require the same work as large loans and the lender is trying to make a profit.

Home equity loans or lines of credit

If you already own a home and want to add a small home to your property, you may be able to tap the equity in your home to get the cash you need.

Instead of a home equity loan or HELOC secured by the new cottage, it’s secured by your primary residence. This means that if you are having difficulty repaying the debt, your primary residence could be foreclosed to honor the loan.

Also, keep in mind that you may be limited in the amount you can borrow. Many home equity lenders only allow you to borrow up to your combined loan-to-value ratio. This is the amount of debt between your first mortgage and your home equity loan, or HELOC, divided by the fair market value of your home.

Gallery: How Homeownership Can Help Solve America’s Pension Crisis (GOBankingRates)

a group of people sitting at a table using a laptop: a financial advisor explaining paperwork to an elderly retired couple in front of the desk.

The terms of your financing may vary depending on whether you choose a home equity loan or HELOC. Home equity loans, for example, typically have fixed interest rates with repayment terms ranging from five to 30 years.

A HELOC often has a variable interest rate and a withdrawal period during which you can pay off your balance and borrow against your line of credit again, just like with a credit card.

After this initial period, you will make full payments until your debt is paid off. HELOC terms can range from five years to 30 years, depending on the lender.

The interest rate on a home equity loan or HELOC may be higher than what you could pay on a traditional mortgage.

RV loans

If your small home is built on wheels, it may qualify for an RV loan.

“The main problem, however, is that RV loans are designed for RVs, not primary residences,” Toms explains. “If someone is looking to finance a small house as their primary residence, it will be difficult to make it work.”

To be eligible for an RV loan, your home must be certified as an RV by an organization such as the RV Industry Association.

With an RV loan, you can expect relatively low interest rates compared to personal loans. The repayment terms can be up to 15 years, giving you plenty of time to repay the purchase.

Personal loans

Many personal lenders allow you to use personal loan funds for just about anything, including buying a small home. Some lenders even offer personal loans of up to $ 100,000, which gives you great flexibility when choosing a mini-home model.

Personal loans can be attractive because they often don’t require collateral, so you won’t lose your small home or other major asset if you can’t pay off what you owe.

But personal loans generally offer much shorter repayment terms – typically two to seven years – compared to other mini-home financing options. And shorter terms could make your monthly payment unaffordable.

Personal loans also tend to have higher interest rates than other financing options. The average two-year personal loan carries a rate of 9.46%, according to the Federal Reserve. And your terms can be much less favorable if you need a longer repayment period and your credit isn’t perfect.

Still, some personal lenders look at non-traditional credit information to determine your creditworthiness, Toms says, which could improve your chances of approval.

Where you can get financing options for small homes

Depending on the type of loan you choose for your mini-home, there are a number of lenders who can help you get the financing you need.

With personal loans, for example, LightStream offers a loan specifically designed for small homes. Other lenders who offer relatively large loan amounts include SoFi, Upgrade, Upstart, and Best Egg.

If you own a property and don’t plan on selling it, you can get a home equity loan or line of credit through your existing mortgage lender or through a home equity lender, such as PNC. , Bank of America or Flagstar Bank.

With other loan options, do your research and compare interest rates, repayment schedules, and other terms to determine which one is best for you.

Other factors to consider when financing a small home

Getting the right loan to buy a small home can take enough time, but it’s not the only part of buying a small home that you have to be diligent about. Do not forget to :

Budget for your monthly payment. Mortgage lenders have strict criteria for determining how much you can borrow. It’s about keeping you from incurring more debt than you can handle. But you might not get the same help from other lenders.

Payments on a small home will likely cost less than, say, a 30-year mortgage on a traditional home. But you’ll still want to use the numbers to make sure your payments are within your budget.

Consider the hidden costs of living in a tiny house. Overall, living in a small house can be cheaper than in a traditional house. But there are some additional costs you need to plan for when calculating your loan repayment and expenses.

For example, you may have to shell out more money for specialized compact and efficient home appliances. And because tiny homes are often found in a gray area of ​​real estate, you might have a hard time finding home insurance. You may need to purchase more than one type of insurance, with overlapping coverages to get what you need.

Other potential hidden costs include:

  • Storage charges for items that will not fit in your home.
  • The cost of renting land, unless you own the property where you will be building or parking your mini-house.
  • Higher food costs due to lack of storage and the ability to buy in bulk.
  • Laundry fee, although you can purchase a portable washing machine.
  • Transportation and installation costs if you buy the house from a factory.

Can I finance a small house with bad credit?

It is possible to get approved for financing a small home with bad credit. You can get approved for a personal loan even if your credit is bad, and other loan options may also be available. However, you will have a hard time getting approved without a co-signer. Even if you get approved, you can expect to pay high interest rates, which may not be worth it until you’ve had a chance to improve your credit history.

Copyright 2021 US News & World Report

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