Tiny house trend: Cute, but can you get a mortgage?

By Gina Pogol
Mortgage Credit Problems Columnist

Dear Gina, I was reading an article about people buying very small homes (less than 500 square feet) to save money, simplify their loves and reduce their environmental footprint. I like the idea, but can I get a mortgage on a home like that? - Dale, Denver, Colo.

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Hi Dale,

Some of these dwellings can be financed as real property and some cannot. Here are the rules for financing real property, with either government or conventional financing:

  1. The home can't be movable. The home must be affixed to a permanent eight-point foundation. If the tiny house is on wheels, it's not a house; it's a toy and can't be mortgaged.
  2. The home must have at least 400 square feet of floor area. Otherwise, it's not a house -- it's a porta-potty.
  3. Your house must be taxed and classified as real property. If you pay your taxes to the DMV, it's not a house.
  4. The property must have been designed and built to be used as a dwelling. Tool sheds or dog houses don't count.
  5. The finished grade beneath the home must be at or above the 100-year flood elevation. Otherwise you don't have a house, you have a houseboat.
  6. Finally, you must also own the land on which the house is (permanently) sited. You can't park it in a national park, a campground or in front of your girlfriend's parents' house.

Your other option is to try for an FHA personal property (Title 1) loan. These are for mobile homes that are not on land owned by the buyer -- for example, homes that will be placed in a mobile home park. The loans carry terms of up to 20 years. Homes eligible for FHA Title 1 financing must:

  • meet the Model Manufactured Home Installation Standards
  • carry a one-year manufacturer's warranty if the unit is new
  • be installed on a home site that meets established local standards for site suitability and has adequate water supply and sewage disposal facilities available

Other buyers of tiny homes find that the easiest way to finance them is to take out a home equity loan against their current dwelling. With the price of most tiny homes ranging from $20,000 to $50,000, home equity financing -- which costs very little to originate -- may be the easiest source of funds to tap.

You may also want to consider borrowing against your 401(k) if your employer allows it. Federal law lets you borrow up to $50,000 against your account. The downside is that, should you change employers, you will probably have to repay the loan or take a sizable hit at tax time.

Finally, a new source of funds for these homes is peer-to-peer lending. You may be able to find someone online at a lending site who will be happy to advance you the funds for your tiny home. It depends on whether you need a bad credit mortgage or not -- bad credit mortgage lenders for tiny houses will probably be very difficult to find.

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