Sunday, 20 October 2019

How to Finance a Tiny House

How to Finance a Tiny House
05 Jan
10:50
tiny home financing
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The tiny home movement has been garnering attention online and captivating the media in recent years. As people seek to minimize their expenses and living space to enjoy other areas of life, tiny houses become a viable option. While purchasing a tiny home may sound appealing, there are many factors to consider before downsizing and joining the movement.

We will walk you through different options on how to finance a tiny house, discuss different types of small dwellings, and talk about the pros and cons of living in a tiny home.

What is a tiny home and how much does one cost?

Tiny homes can vary in structure, makeup and size, but they are typically 600 square feet or smaller, according to Tiny Home Builders. For comparison, the average American single-family home is 2,392 square feet, according to the Census Bureau.

Tiny homes can vary dramatically in price. Depending on the location of the home, the materials used to build your tiny home or the selling price of a furnished small dwelling, prices can range from $15,000 to $100,000.

For example, if you decide to DIY (do it yourself) your tiny home, you can expect to pay anywhere from $15,000 to $20,000 in supplies, plus the time and effort it takes to build it. Should you purchase a completed shell from a tiny home vendor such as Tiny Home Builders, you can expect to pay up to $61,000. And tiny houses on the market can exceed $75,000.

While these prices may seem hefty for a tiny home, keep in mind that the average cost of a new home in the U.S. is $395,000.

4 tiny home financing options

Typically, would-be homeowners get a home mortgage to finance the purchase of their house. While some types of tiny homes qualify for a traditional mortgage, others do not.

So, what are your financing options? Here are four financing options to consider as you aim toward purchasing your own tiny home.

1. Home mortgage

Obtaining a traditional mortgage may be difficult for a tiny home because most lenders require a minimum loan amount, which tiny homes often do not meet.

“The bigger issue is probably the appraisal,” said Mitch Mills, lending manager at Sugar House Mortgage in Salt Lake City. “An appraiser is tasked with arriving at a valuation for a property based on recent sales of like properties. In other words, an appraiser would need to be able to find other tiny homes that have sold in the same market area, ideally within the past 90 days.”

To qualify for a home mortgage, the home must be on a traditional foundation.

“Fannie Mae, Freddie Mac and [the Federal Housing Administration] require a property to be situated on a permanent foundation and connected to public utilities. Some of the tiny homes I’ve seen are on wheels, and this would preclude them from being eligible for traditional financing,” Mills explained.

If the tiny home meets size requirements, is traditionally built and is on a permanent foundation, you may be able to acquire a traditional home mortgage. To compare mortgage rates, check out this tool by LendingTree, which owns MagnifyMoney.

2. Home equity line of credit

A home equity line of credit, also called a HELOC, is a type of secondary loan secured by a lien junior to a mortgage. Using a HELOC is another way to finance the purchase of a tiny home.

As you pay down a mortgage, you are building equity in your home. When you use a HELOC, you borrow against the equity you’ve built to secure your secondary loan. For example, if you purchased a $1 million home and have paid off $500,000, you have that much in equity. Using a HELOC, you could get a second mortgage for a specified amount and use that money to purchase your tiny home.

3. Recreational vehicle loan

Some tiny homes are on wheels, making them portable. If they are roadworthy and certified by the RV Industry Association, they may qualify for a recreational vehicle, or RV, loan. LightStream, a division of SunTrust Bank, offers financing up to $100,000, which can  be used for your tiny home purchase.

4. Personal loan

The fourth financing option for a tiny home is a personal loan. A personal loan is an unsecured loan that you can use for any purchase. Once obtained, you can use the borrowed funds for any item, such as a tiny home. Using a personal loan to finance a tiny home can be a good option because you won’t have to get your home appraised or approved to qualify for the loan, allowing you to purchase a tiny home with a foundation or one on wheels.

Personal loans may also be a smart way to finance your tiny home because you can usually borrow up to $50,000 depending on the lender. More information on personal loans to come.

3 personal loan lenders offering tiny home financing

If you choose to finance your home using a personal loan, here are three lenders that offer tiny home financing.

1. LightStream

LightStream offers personal loans that can be used for financing a tiny home. It offers a fixed-rate loan with no fees or prepayment penalties.

  • Terms of loan: 24-84 months
  • APR range: 3.34%–16.99%
  • Origination fee: No origination fee
  • Loan amount range: $5,000–$100,000
  • Credit score required: 660 minimum
LightStream
APR

3.34%
To
16.99%

Credit Req.

660

Minimum Credit Score

Terms

24 to 144

months

Origination Fee

No origination fee

LightStream is the online lending division of SunTrust Bank.Read More


Your APR may differ based on loan purpose, amount, term, and your credit profile. Rate is quoted with AutoPay discount, which is only available when you select AutoPay prior to loan funding. Rates under the invoicing option are 0.50% higher. Subject to credit approval. Conditions and limitations apply. Advertised rates and terms are subject to change without notice. Payment example: Monthly payments for a $10,000 loan at 3.34% APR with a term of 3 years would result in 36 monthly payments of $292.31.

2. SoFi

SoFi offers personal loans ranging from $5,000 to $50,000, which would allow you to purchase a tiny home. SoFi offers unemployment protection, making it a unique lender. Should you lose your job with no fault of your own, the lenders will allow you a payment grace period and connect you to job placement services so that you can get back on your feet.

  • Terms of loan: 36 to 84 months
  • APR range: 6.99%–14.99%
  • Origination fee: No origination fee
  • Loan amount range: $5,000–$50,000
  • Credit score required: 680 minimum
SoFi
APR

6.99%
To
14.99%

Credit Req.

680

Minimum Credit Score

Terms

36 to 84

months

Origination Fee

No origination fee

SoFi offers some of the best rates and terms on the market. Read More


Fixed rates from 6.99% APR to 14.99% APR (with AutoPay). Variable rates from 6.26% APR to 14.10% APR (with AutoPay). SoFi rate ranges are current as of November 30, 2018 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.26% APR assumes current 1-month LIBOR rate of 2.33% plus 4.175% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.

To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.

See Consumer Licenses.

SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.

Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi's underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)

3. LendingClub

LendingClub is another lender that offers personal loans. Because you can use a personal loan for any reason, it can be used toward your tiny home.

  • Terms of loan: 36 or 60 months
  • APR range: 6.95%–35.89%
  • Loan amount range: Up to $40,000
  • Credit score required: 600 minimum
LendingClub
APR

6.95%
To
35.89%

Credit Req.

600

Minimum Credit Score

Terms

36 or 60

months

Origination Fee

1.00% – 6.00%

LendingClub is a great tool for borrowers that can offer competitive interest rates and approvals for people with credit scores as low as 600.Read More

What to consider before financing a tiny home

Now that you know your financing options, it’s time to consider if owning a tiny home is the right decision for you. Before moving forward with a new lifestyle of tiny living, consider the pros and cons of owning and living in a tiny home.

Pros of living in a tiny home

Tiny homes can be less expensive than a standard home. For those who don’t want to rent and wish to avoid the large expense of a standard-sized home, tiny homes can be a great option. Opting for a tiny home allows you to cut back on expenses typically associated with homeownership. While you’ll still have to pay for your tiny home upfront, plus utilities and basic living expenses, they will likely be much less compared to a traditional homeowner. Owning a tiny home allows you to feel the pride of homeownership without the financial burden.

Tiny homes can offer financial freedom. Because your mortgage or loan payment will likely be less than a traditional mortgage, you’ll likely have a surplus of discretionary income to spend, giving you financial freedom. If you wish to spend your extra money traveling, pursuing higher education, or investing, owning a tiny home can offer financial freedom.

Tiny homes can provide more free time. With 600 square feet or less, you only have so much space to clean and upkeep. Because you’ll spend less time cleaning your home and doing yardwork, you’ll have more time to enjoy other hobbies. Tiny homes can provide more free time in which you can enjoy life and the things you like to do with it.

Tiny homes can be portable. Homeownership may appeal to you, but you don’t want to be tied to one location. And you don’t want to rent. Because tiny homes can have wheels, you have flexibility. You can settle wherever you like, permitting zoning laws. If you have wanderlust and wish to explore the country without living out of a suitcase, owning a mobile tiny home is a great option that allows you flexibility and movement while still enjoying the stability and comfort of homeownership.

Cons of living in a tiny home

Tiny homes can be hard to place. Because zoning laws vary city to city and state to state, you cannot place your tiny home anywhere you’d like. Flexibility is a double-edged sword. Tiny homes allow you to take your home anywhere, but you’ll have to make sure you’re moving to a place where it’s legal to place your tiny home. Sometimes, the location you desire may not allow for tiny homes.

Tiny homes can be cramped. Tiny homes are, in fact, tiny. That being said, if you wish to entertain guests, space will be very limited. Also, if you are looking for some privacy in a secluded space, your options are sparse since your space is so small. If the thought of lack of privacy gives you anxiety, tiny homes may not be right for you.

Tiny homes don’t have all the amenities of a traditional home. Depending on your tiny home, you may not have certain amenities such as laundry machines, dishwashers or a full-size refrigerator. While this may be a perk of simplifying, it can also frustrate some potential owners. When purchasing your tiny home, ensure it has all the features you need.

Which type of tiny home do you want?

Do the pros of owning a tiny home outweigh the cons? If so, let’s briefly discuss the different kinds of tiny homes available.

  • Tiny traditional homes: Think your typical house but shrunk down to a smaller version. Tiny traditional homes will have a foundation and will be made of the same building materials, such as wood, plywood and concrete. They are not mobile and do not have wheels.
  • Tiny house on a trailer: Simply put, this is just a tiny house on a trailer. It can be moved from location to location when pulled by a truck. Like a traditional tiny home, they are usually built out of normal building materials.
  • Converted storage shed: A storage shed is usually made of steel or galvanized aluminum, but a converted storage shed can be used as a type of tiny home. To make it feel more like a home, owners can install insulation and drywall and design the inside just as they would an apartment or home.
  • Container home: A container home is a storage unit or semitruck shell transformed into a living space. Once revamped, designed and decorated, it doubles as a home for minimalists.

Does your city permit tiny homes?

The last thing to consider before purchasing a tiny home is where you’ll put it. Each city and state has different building codes and zoning laws that can affect where you are legally allowed to place your tiny home.

Some states require the tiny home to be an accessory dwelling unit (ADU), meaning it is on the same property of a traditional home. But some states have begun adopting the idea of tiny housing and have made it more realistic for tiny homeowners to build and live in the state outside of an ADU. These states have more progressive regulations making it easier for tiny house hunters: California, Colorado, Florida, Massachusetts, Michigan, New York, Oregon and Texas.

The American Tiny House Association has compiled state-by-state information regarding zoning laws and construction codes for tiny houses. Check out the complete guide to see if owning a tiny home in your city is possible.

The tiny home movement is gaining popularity and offers a variety of perks for people looking to minimize, downsize and enjoy a flexible lifestyle.

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Sage Evans
Sage Evans |

Sage Evans is a writer at MagnifyMoney. You can email Sage here

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