Can You Get a Mortgage for a Tiny House?

by Cait Flanders October 1, 2014 / No Comments

For those of you who don’t know, when I’m not doing my job here at RateHub.ca, I can usually be found working on my own blog. It’s been mostly personal finance-related, up until this past summer, when I joined the minimalism bandwagon, did a massive declutter and purged 46% of my belongings (so far) from my home. The process was tough at times, but has subsequently changed the way I think about “stuff”. So far, I can safely say: less is definitely more.

Throughout this journey, I’ve been doing a lot of research on minimalism, and am happy to report that it means a little something different for everyone. No, you don’t have to learn how to live with only 100 “things”. But yes, you should try to only fill your home with things that serve a purpose. No, that doesn’t mean you can never shop. But yes, you should be a more conscious consumer and only buy what you need. Does that make it sound less crazy / a little more practical? Good!

Where I may have gotten derailed and jumped onto the crazy train is at the tiny house movement: homes that are typically 100-400 square feet, maximize their space and have just enough storage for you to keep what you need. The movement started in 2002, but has become more popular since the financial crisis, as it offers an alternative (and less expensive) route to homeownership. Not only are they cheaper to buy (typically $25-40,000), tiny houses are cheaper to maintain.

Personally, I’m obsessed with the idea. Who doesn’t want to cut down on their monthly housing expenses, save more and live a simpler life (with more cash in their pockets)? But it’s made me curious about the financial side of things: how do people pay for tiny houses? Can they get mortgages for them or do they have to pay with cash? Fortunately, my job puts me in the unique position where I can find out – and share the answers with all of you!

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Are you curious if you can get a mortgage for a tiny house? You can – but only if you can answer “yes” to the following question:

Will the tiny house be built into the ground on a piece of property you own?

If the answer is yes, congrats – you can take out a construction mortgage to build your tiny house! You will still need to buy that piece of property, if you haven’t already done so. (You can save money by buying land in a more rural area.) You will also need to read up on, and comply with, your municipality’s definition of a “minimum habitable structure”; this means you may have to build a not-as-tiny-as-you’d-hoped house, but that’s mostly to protect any future tenants, should you ever rent it out. Still, the good news is that you can finance your tiny house, if you need to!

If the answer to either part of that question is no (which is highly likely, since most people want their tiny houses on wheels), you’d better start saving. When it comes to handing out mortgages, banks have to decide which risks are worth taking and, so far, tiny houses on wheels don’t make the cut. Why? Well, there are three reasons. For starters, as mentioned above, most tiny houses don’t meet any municipality’s definition of a minimum habitable structure. No bank wants to finance a construction project that won’t be built to code. Secondly, the resale value on a tiny house is not good. In fact, you’d be lucky to break even, but you’ll likely have to sell for much less than what you paid for it. The final reason is that they have no idea where you’re going to park it and, unfortunately, the number of options that are considered to be illegal outweigh the ones that aren’t.

Basically, there’s a lot of risk that can’t be secured by any collateral.

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How to pay for your tiny house on wheels

If that hasn’t scared you off, you still have options. Since most tiny houses only cost between $25-40,000, you may be able to get a personal loan from a bank, if you have some other assets to use as collateral. If not, you can do one of two things:

  1. Finance through a tiny house vendor. If you don’t want to build the tiny house yourself, you can pay a tiny house vendor to do it for you. The added bonus with going that route is most offer a financing option. Typically, you’d pay 1/3 of the price upfront as the deposit, another 1/3 when the tiny house is at the “lock up stage” (has doors and windows installed) and the final 1/3 when it’s completed. You’ll still need the time it’ll take to save up this amount of cash, but you don’t need to have it all saved up before you can put your order in.
  2. Save up / pay for your tiny house with cash. With this option, you can then choose to either buy a tiny house from a vendor or pay for the materials and build it yourself. This option is not what most people want to hear, but think about it this way: you’d probably have to save up $25-40,000 to put a down payment on a condo or home anyway, right? How much better would it feel to save up and pay for your entire home with cash, and then never need to make a mortgage payment? (You’d still need to pay rent to park it somewhere, though.)

Part of the philosophy of the tiny house movement is to remove clutter and stress from your life. By paying for a tiny house with cash, you’re removing the single largest financial burden that most people carry for years. By alleviating yourself from that stress, you can actually enjoy your home and then invest your money elsewhere. And if travel is at the top of your wish list, a tiny house on wheels means the world (or at least the continent) is your oyster.

What do you think of the tiny house movement? Is it an affordable homeownership option that is soon to explode, or a fad that will eventually die off?

Flickr: rowdykittens