One of the ways to make housing more affordable is to downsize your expectations. Often, that means looking in less desirable neighborhoods, in smaller markets, and, in many cases, buying a home with less square footage.
Some people take that last option to an extreme, opting for tiny houses. These homes are exactly what they sound like.
They fit an entire living space into a footprint that’s often no larger than a storage shed, including a bedroom, bath, kitchen, and sitting area. There’s no fixed definition, but a commonly used standard is a dwelling of no more than 400 square feet.
The designs are often creative and stylish and make highly efficient use of space through lofts, foldout beds, and other space-efficient options.
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.
In fact, tiny homes will fit on a trailer to be towed from place to place.
While they’re growing in favor with many people, financing a tiny home is one of the hurdles to overcome.
How to Get Financing
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. Many mortgage lenders have minimum loan limits, and when a tiny home costs $30,000 to $50,000 (depending on amenities), that may disqualify a borrower from getting a tiny home loan.
Another challenge is that a mortgage requires that a home be placed on a permanent foundation, which doesn’t work for portable tiny homes. Even when the location is fixed, there can be issues with zoning and local codes.
One way around these potential barriers is to seek recreational vehicle financing instead of a mortgage when the tiny home is designed to sit on a trailer. The qualifier is that the unit must meet 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.
Borrowers often opt for an unsecured personal loan to build or buy a tiny home. Interest rates are higher than for an RV loan, but these loans are more flexible and based on a customer’s credit history and ability to repay. How the money is used does not factor into the decision to lend.
Home Equity Loan
Another option is a home equity loan if you already have a home with some accumulated value. Home equity loans have very low rates, and their repayment terms are commonly longer than for RV or personal loans.
Also, because they’re considered a mortgage on your primary residence, the interest you pay is tax-deductible for most borrowers who itemize deductions.
You may or may not be able to deduct interest on a personal loan used to buy or build a tiny house if you’re using it as a primary or secondary residence, but generally, it’s not allowed.
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.
According to IRS Topic 505, the property must serve as collateral on the loan for the interest to be tax-deductible. 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.
If you’re working with a tiny home contractor or builder, they may offer financing in addition to building the home. A builder may also offer RV financing if the tiny home meets RVIA certification standards. It is worth asking about in this situation.
Cash is always king, and if you can afford to pay for a tiny home upfront from your savings, that’s a surefire way to finance it at the cheapest possible interest rate with the lowest risk.
If you’ve got high enough limits, one other way is to simply charge the cost of the tiny home to your credit card. It’s pretty much guaranteed you’ll pay a high interest rate using this option, but if you’ve run out of other ways to finance, consider this, but only as a last resort.
Zoning and Code Issues
Most communities won’t allow you to live full-time in an RV, which is defined as any dwelling on wheels of less than 400 square feet according to HUD guidelines. Many municipalities also won’t allow homes on a foundation or permanently sited manufactured homes of less than 800 square feet.
However, some have no minimum size requirement, so you’ll need to check on local codes and regulations if you’re considering this option.
There may also be challenges regarding connecting to utilities or 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.
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This is another challenge because homeowner’s insurance requires a unit to be placed on a foundation. A tiny home on wheels does not qualify under this standard. The workaround here is to try and secure an RV insurance policy instead.