Guide: Financing Your Tiny House
Photo by Belathee for CupofJo
Of all the hurdles of going tiny, financing might be the biggest. There currently aren't many great options for tiny house loans that can be secured on the value of the home itself, unless your tiny is RVIA-certified. Which means that you won't be able to buy a tiny house the same way that you might buy a car or a house (where the bank owns the item and you slowly buy it from them).
Instead, you have three options (for tiny homes that aren't RVIA-certified):
Cash
Equity secured loans
Unsecured personal loans
Fortunately, you can still find the financing you need! We were able to get over $100,000 in unsecured personal loans for our home. You just need to be resourceful and figure out which of the following financing options works best for you.
**Quick Note**: Before we get started, I want to address some of the emotions that are involved in financing your tiny house. It’s difficult to get financing for your tiny house. At times, you’ll probably have some dark thoughts, you'll worry whether you’re being financially irresponsible. But remember this: if you were buying a regular house for $100,000, you’d get a hundred loan offers in a split second. YOU ARE NOT THE PROBLEM. The problem is that there are no financial systems set up to profit off of tiny houses, so the enthusiasts are on their own.
So, here’s what you need to do to help handle these feelings. First, figure out how much you can afford in financing payments. Second, get the loans that fit within your budget under the best terms possible and accept help from others if you can. Third, as long as your loans fit within your financial model, then ignore all the noise. You’re not being irresponsible. STAY STRONG AND BE RUTHLESS.
Now let’s get crackin’!
1) Cash, Friends, and Family:
Before you start thinking about any other options, take stock of the resources available to you through your own assets and the network of people who care about you. While you may not be able to come up with the full cost of your house, you might be surprised how much of a dent you can make, which will make a big difference once you start approaching banks. Getting a $50,000 loan is much, much easier than getting a $100,000 loan.
If you or any of the people in your network own a traditional home, then this may help you out with option #2: Equity Secured Loans.
2) Equity Secured Loans:
If you own a car, a house, a retirement fund, or any other asset that can be valued by a bank, then you have “equity” through that asset. This means that a bank will usually give you a loan secured on the value of that asset.
The upside of these loans is that you will usually get better loan terms. The downside is that if you default on your payments, the bank could seize your property. TAKE THIS VERY SERIOUSLY. Especially if someone else is helping you out with an equity secured loan (e.g., your parents take out a loan on the value of their house)
Again, consider that you don’t have to get the entire cost of your home from secured loans... perhaps it’s just the extra $20,000-$30,000 that gets you over the finish line.
3) Unsecured Personal Loans:
Unsecured personal loans tend to be the best option for most tiny home buyers. Your terms will likely be worse than a secured loan, but you can get approved for a personal loan in just a few days. You can also simultaneously accept multiple loans from different lenders if you need a lot of financing.
For example, we accepted $50,000 from Lightstream, $35,000 from Sofi, and $25,000 from Amex. None of these organizations would’ve given us the total amount that we needed to buy our tiny house ($110,000), but independently, we were able to get what we needed. Just remember to accept them all at once! As soon as you’ve taken out a loan (especially a personal loan), it will become much more difficult to get additional financing!
Remember the talk about dark nights and a sense of irresponsibility?! This is really where it comes in. We would love to have a mortgage from a single institution, but alas, that’s just not an option for most tiny house buyers.
The good news is that you stand to lose a lot less through an unsecured personal loan since there is no collateral. However, it is still possible that if you defaulted on these loans, you would have your wages garnished, and it’s also possible that a bankruptcy court will force liquidate your tiny house in the process of discharging your debt (but this is unlikely). So while unsecured, they're incredibly serious loans.
In-depth — Survey your options and make a plan:
When Bela and I financed our house, we paid cash and accepted financing from three separate banks for the remaining balance. If you do something similar, you need to carefully arrange and apply for financing with all these institutions, then accept all the financing agreements at the same time.
This means you need to do a fair amount of research into which institutions will work the best for you. Here are some of the best options:
Lightstream: The best tiny house lender, hands down. With the help of a co-sign from my mother, we were able to get $50,000 at 4.99% APR paid over seven years. The application process is simple and you won't find better terms for an unsecured loan.
Credit Unions: If you belong to a credit union, check with them about personal loans. They generally offer better terms and are more friendly towards personal loans than larger institutions. Often times, the company you work for provides you access to a credit union, so don’t forget to check with your employer.
Credit Cards: Many credit card institutions offer pre-approved personal loans with relatively low APR. We were able to get $25,000 from American Express at 6.98% paid over three years. This makes our monthly payments pretty high, but you’ll likely have to stomach some less than ideal financial arrangements if you are in need of $100,000 or more to build your house.
Sofi: Simiar to Lightstream, Sofi is online and extremely easy to use. They’re a source of very easy personal loans, but we found that their terms were not as friendly as Lightstream. In the end, however, we ended up getting a loan for $35,000 at 11.49% APR over five years. And though this is a much higher APR than we would have liked, it was necessary to get us over the finish line.
Upstart, Best Egg, Lending Tree: A few other companies that might help you secure enough to wrap up your financing. All of these are for $35,000 or less and generally carry high APR. Do what works for you.
Final Reminder: Arrange your agreements and accept all of them at once
I’m sure some financier will read this and then vomit off the side of the table, but don’t let it get to you. Banks don’t give loans because they can’t appreciate the value of your tiny house and they can’t appreciate that it will be your home (i.e. that it will displace your rent). So, do the math carefully and find out what you can afford, then figure out an arrangement that fits within your budget.