Tiny House Q&A: What about financing small houses?

Q: “What about financing small houses?”

A: Getting a loan for a tiny house can be difficult for a variety of reasons:

• Cost Overruns. Home loans are based on the appraised value a home, not necessarily based on what it cost to build. A bank won’t loan more money just because there were cost overruns on a project. Most tiny house builders make choices based on personal preference and not profitability. It’s common to spend more money for quality materials and custom designs. These may not result in a higher market value for the home. Many tiny homes are owner-built from purchased plans or from designs people make on their own. Materials are often purchased from various sources including repurposed materials. So, it may be difficult going into a home build project to know how much it will ultimately cost.
• Future Value Concerns. To establish a loan, banks need to determine current and future value of a home. Standards of building vary widely — resulting in varying degrees of durability, safety, and reliability. This impacts future values significantly. The market is new, and with few home sales, there’s little data available to estimate appreciation. For this reason, banks have a difficult time providing a loan without knowing whether a property will go up in value or down in value.
• Insurance. When buying a home or car, the lender typically requires that the buyer pay for insurance to cover the full replacement cost of the item being purchased. It’s difficult to get insurance for a tiny house on wheels. As a result, banks will not want to provide a loan for an uninsured purchase.
• Loan Recovery. When a home owner stops paying their mortgage, a bank will foreclose, evict the buyer, and sell the home to recovery the loan amount. With houses on wheels, it’s more difficult to track down the house and owner. Without very good credit and references, a bank may not want to risk someone skipping town and taking their home with them.
• Unknown Market Value. A bank typically provides a loan amount that’s smaller than the market value of the home. That way, if they need to foreclose and sell a home, they can get their money out of the home when it sells. The market for used small homes is new and still unpredictable. If a bank were to provide a loan for a tiny home, they’d likely want a very high interest rate and a large downpayment to make sure they don’t lose money if the buyer stops making loan payments.

Insurance and Loan Options for Small Houses

Some small houses are certified as RV equivalents. This makes financing options more available. There’s a nice article on the Tumbleweed website that explains RVIA certification and financing for their homes. The Recreational Vehicle Industry Association sets standards in construction and safety.

If the insurance company and bank can be reassured about the construction standards, quality, safety, and durability of a home, it’s more likely they can work with you. If many homes are built to the same standard, and sold for the same price, then it’s possible to begin evaluating resale values, and predict the future value of a specific home. This helps insurance companies and banks work with tiny home purchasers.