Tiny house, tiny mortgage?

You may think that getting a tiny house and having a mortgage are mutually exclusive. But you’d be wrong – not all tiny houses are dirt cheap, and some of the people who are most likely to buy them aren’t necessarily in a position to pay for them in cash. But financing a tiny house can be tough.
Tiny houses vary in terms of size, materials, and portability, among other things. Some people define a tiny home as anything under 1000 square feet, while others are less than 500 square feet with wheels and towing capabilities. If you want to buy or build a tiny home, you can find one anywhere from $15,000 to upwards of $50,000. They can look like (or be) shipping containers, cottages, log cabins, or even micro-condos.
You may not have as many options, however, when it comes to how you’re going to pay for it, as most mortgage lenders won’t touch tiny houses with a 10-foot pole.
Limitations for lenders
When you think about it, it’s easy to understand why lenders want to stay away from it. You may think that a home is a home as long as someone is living in it, but that’s not the case. Provinces, districts, and municipalities across the country set their own definition as what counts as a dwelling and what’s able to be built for residential use. As such, there isn’t really a standard for what constitutes a tiny home, and lenders aren’t going to front a loan for a home that may or may not be built to the standards of a specific location. Not to mention that a large part of lender criteria for a loan – apart from borrower credit and income – is the value of the land. If a tiny home is on wheels and can be moved from one place to another, it makes it difficult for a lender to appraise the home, as well as determine the resale potential of the home.
“Investment potential of a tiny house is also limited, given uncertainty about how long it will last, and code, zoning, certification and safety issues. These factors also make lenders unwilling to provide financing, and make fire insurance policies extremely difficult to obtain,” a CMHC Housing Observer report states.
Of course, since most people who are going to buy a tiny house don’t want a mortgage, it may not be a big deal. It does, however, limit the number of people who may be receptive to this type of home and lifestyle. Tiny home pricing varies wildly, and even though they can be inexpensive, sometimes people would rather have the option to finance it rather than paying for it outright.
So what’s a tiny home hunter to do?
Know your financing options
Depending on whether or not you want your tiny home to have wheels, you may be able to get a personal loan or line of credit to cover the cost of buying one. The home may qualify as an RV and you may be able to finance the purchase through a type of automotive loan.
There are a few tiny home builders that offer financing if you’re building from scratch, but don’t count on being able to get normal construction financing for a tiny home, especially if it’s a trailer. If you want a tiny home on a foundation, then you may have more options available to you, and available financing may resemble that of a home in a trailer park. You might have to have a 20 per cent down payment, as you would with some lenders for unconventional properties, but it traditional financing would still be an option.
Keep in mind that if you comply with some of the requirements necessary to secure financing, such as hooking it up to local services, such as water and hydro, or securing it to a piece of land by using a proper foundation, then you might not have the tiny house experience that you wanted, such as living off the grid and/or being mobile.
“We usually recommend clients deal with a local credit union,” says David Goncalves, founder and mortgage agent with Vine Group. “We have a lot more success when we go to local credit unions because the credit unions better understand the demographics of the area, they understand the risk levels of their close communities so they’re more likely to lend out to them, where the traditional banks on the trailer park-type stuff, they usually want to stay away from that . . . rates are going to be a little bit higher than the retail banks but not as high as subprime lenders.”
Micro condos
While most people think of tiny homes as the kind that you see highlighted on HGTV programs, but another growing segment of the category is the micro condo, loosely defined here as a condominium that’s less than 500 square feet. They’ve been growing in popularity from west to east coast, and they don’t look to be disappearing anytime soon.
“There are certain lenders out there who just won’t touch them at all; anything under 500 square feet, they won’t touch them – regardless of price, regardless of client – and it has more to do with the lender’s individual exposure to the condo market than it has to do with the consumer. It’s very non-consumer-driven. It’s just simply, they feel over-exposed and so they’re trying to reduce that risk in that marketplace,” Goncalves says, although he adds that there are some things that make the micro condos more attractive to lenders, such as having a separate bedroom. “But you know what . . . there are some insurers that will insure them and there are banks that will go as little as five per cent down on them.”
Many would-be home buyers are getting priced out of housing markets and they’re willing to embrace a more minimalist lifestyle in order to stay in the highly desirable areas where they live, work, and plan. Because of this, Vine thinks that lenders have a responsibility to find ways to finance different housing options, and ways “to support the marketplace in making sure that it’s healthy and making sure that there are solutions for those individuals,” he says, adding that CMHC’s mandate concerns affordable housing and finding solutions for home ownership, and they should continue and probably even expand their program when it comes to tiny living, including living on boathouses. “That’s very popular now in Vancouver because of the price point, so that’s being funded by credit unions right now and CMHC should be getting involved in this because the public can’t afford the traditional residential properties anymore in the big cities and the values are not gonna come down. The supply and demand curve is suggesting that prices will continue to rise over the next five years.”
First step
Banks and other lenders have different policies and different risk tolerance for different types of properties, so you want to figure out what type of home you want before going to a mortgage broker or lender. And, Gonclaves says, let your broker know this information when you go to get a preapproval. As we’ve seen, not all lending options are available for all types of assets, and geography plays a big role in that determination. So when the lender says you’re qualified for $250,000, make sure you explain your intention to buy a tiny home. “The bank might turn around and say, ‘Well sorry, we can’t finance that now,’ and you might have to go somewhere else,” Goncalves says. If you plan in advance, you can avoid disappointment down the road.

More Mortgage Guide