Even the tiniest of living spaces can be financed simplistically
Have you been dreaming of staying in a 1000 square feet home? The moot question is would you downgrade your dream to encompass a grand 100 square feet of living space? Seems impossible, or shall we say foolhardy? But people are waking up to the potential of frugal living in even more frugal spaces. These days living in spaces less than 500 square feet seems to be the norm for an increasing and vocal majority. The motivation lies in the increasing awareness that larger spaces involve wasteful expenditure and uneconomical practices that ought to be curbed. The accent seems to be to lean more on optimum utilization of space which is commensurate with one’s needs. As always, even when dealing with tiny spaces the chief hurdle seems to be finance.
The problem of sourcing adequate finance for tiny homes
The problem in dealing with finance for small spaces is that bankers generally view such homes as being portable and not worth the risk. Here today, gone tomorrow is a dictum that doesn’t sit well with risk averse bankers. The difficulty stems from the fact that institutional lenders continue to take a dim view of tiny spaces and refuse to see them as proper homes, and that leaves a sizeable financial burden on the shoulders of the innovative homeowner. Even if we come across willing lenders, they may not sense a business opportunity and may consider it unprofitable to finance $28,000 to $50,000 for tiny homes.
Administratively speaking, the $30,000 home will call for the same appraisal and involve the same procedural complications as one would face in financing a $300,000 home. The steps involved and the expenses tied to processing the loan will not vary much, and that would leave lenders wondering if they can recover their costs, and if smaller homes are worth the trouble. So from a banker’s perspective, the cost incurred would be the same but the earning potential of smaller homes would be proportionately less. Over and above such considerations, the tiny home doesn’t come cheap and you could be handling a budget $25,000 and above if you are focusing on tiny spaces. If construction involves professional contractors the final bill could spiral.
Options for raising adequate funds for tiny homes
Statistics will tell you that over 70% of small homes do not carry mortgages, but the balance 30% are finding innovative ways to gather funds for their dream home, even if it is tinier in scale.
1. The Home equity route for tiny home finance
If you already own a larger home it becomes easier to tap into the existing equity in your home to finance a smaller venture. In such instances the smaller home could be treated as a vacation home or even as a rental engine to fuel existing income, especially if the new home is strategically located in tourist centers or near resorts.
As indicated by the name “home equity”, you need sizable equity in your exiting home to make your dream come true. By way of a simple illustration, let us assume that your present home is worth $300,000 and your mortgage balance is leveling at $160,000. You can plug into a funding source that can potentially yield $140,000. The lender will not hesitate to finance a fraction of that amount, considering that he has access to the equity and security dormant in your existing home.
2. The Recreation Vehicle (RV) loan route for financing tiny homes
The problem is compounded for those people that do not own a home at all. For them there is new hope in the bylaws governing RV loans. Surveys reveal that more citizens are literally on the road moving from place to place and taking their home comforts along with them. The RV loan offers a new opportunity to homeowners to cash in and indulge their roaming instincts with a home in tow. These new rolling home and away dwellings are attracting a lot of takers. A new breed of manufacturers is obtaining licenses and necessary approvals for constructing tiny dwellings thereby paving the way for RV loans.
3. Leveraging a banker’s unsecured loan as a source of instant cash
Unsecured loans are finding their feet in the hugely expanding consumer financing market. Unlike the mortgage loan that leverages the home as collateral for the home loan, the unsecured loan doesn’t require underlying collateral as security for taking a loan. If there is substantial default in mortgage payment the homeowner ultimately forfeits the property and the lender takes possession of the home, but such a risk is not evident in an unsecured loan. Because of the higher risk to the lender, unsecured loans almost always carry higher interest rates. Fortunately, all lenders do not price unsecured loans beyond the reach of the layman, and cheaper unsecured loans are available for the asking, especially if you have a good credit rating.
If you are aiming for a banker’s unsecured loan you need to show a better than usual credit record, a low debt ratio, a steady source of income (preferably a rock solid job) and strong financial management skills that should be evident from your credit report.
Tiny homes are moving from a passing fad to lifestyle statement and simplicity in space utilization and affordable living conditions are the driving factors pushing the growth graph in people that desire such homes. Growing numbers of retirees are viewing tiny homes as an opportunity to downsize from palatial homes that are no longer affordable.