Want a Nontraditional House? Here's How to Finance It!

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The main photo is courtesy of Dwellito and Modal, which features The Modal 01, a 436 square-foot modular home.

Though progress continues to be made in alternative residential construction, one drawback is that nontraditional houses are more difficult to finance. Here are creative options to help you break into the home marketplace.

The quest to own a home is being met with challenges every day. Rising real estate prices, coupled with corporations and iBuyers outbidding the average prospective home buyer is causing many to lose hope of attaining the American Dream of homeownership.

Not So Fast!

We can attest that you can own a home, albeit perhaps not one having 4,000 square foot of living space, or an infinity pool with spectacular views. However, there are many options to secure a nice place to call home that can be modified and expanded over years to come, as your financial situation strengthens and your lifestyle needs change.

To help you think anew, here are creative methods that can help you achieve your end goal of owning a home that meets your needs and tastes now and in the future.

Three Revised Rules of Real Estate Ownership

The most important rule of real estate ownership has long been “Location, Location, Location”. However, that edict needs to be updated for those facing the most daunting challenges while trying to enter the market.

We propose “Land, Land, Land!” – for the following invaluable reasons:

Land is affordable
Land is flexible
Land is valuable
Land can be monetized in many ways
Land has high appreciation potential
Land is a great starting point
Land can “host” many types of house structures
Land can help secure a loan for an alternative home type you wish to build or buy
Land can be used to host a community of tiny houses
Land is plentiful in North America

For more information on how to find and purchase land, see our article Never Thought You’d Own Land? Think Again!

Alternative Home Types

With increasing home prices, many prospective buyers have been considering creative, more-affordable, nontraditional home types, such as: Tiny Houses; Prefab Modular Homes (including 3D-Printed Homes); Shipping Containers; and Mobile Homes.

Though many of these types of structures are significantly smaller than traditionally built homes, the construction methods for these buildings are also introducing additional cost-efficiencies besides size. Smaller home construction has introduced the following improvements and innovations: faster build times; fewer delays; lower cost-per-square-foot; lower-cost materials & methods; etc.

Besides reducing costs, the most innovative manufacturers of pre-built homes are also striving to make disaster resistant homes, further increasing the value and lifespan of these innovative homes.

Tiny Houses

Tiny homes, or homes that are 400 square feet or less, gained appeal with the proliferation of TV shows such as Tiny House World, This Small Space, Tiny House Nation, among others. These shows have popularized a movement around the globe that suggests “small is good” and that appeals to consumers wishing to “downsize” their lifestyles, both literally and economically.

We agree with this approach, especially if you are single, are part of the “gig economy” and haven’t quite made plans as to where you truly want to lay down roots. A tiny house can be affordable, self-financed and mobile to allow for flexibility and efficiency for those wishing for more simplicity in their lives.

We especially like how space constraints are causing designers and builders to produce highly functional and flexible solutions, always a good thing for the construction industry.

Prefab Modular Homes

There are a number of benefits and options when constructing a home with prefabricated materials. The plethora of newer, disaster resistant technologies is best suited for those looking for cost-effectiveness, longevity and durability, with fewer homeowner headaches. Prefabrication allows a homeowner to save money, since building on-site can be extremely labor intensive, expensive and more prone to imperfections.

Modular homes in general, allow homeowners to grow the size and utility of their homes, as their life situations change, such as marriage, children, caring for aging parents or the need to monetize portions of the home. Again, if you start your quest for homeownership with an adequate parcel of land, you can leverage prefab modular construction to buildout your home over time.

Advances in disaster resistant construction are being incorporated with advances in modular construction methods, making prefab construction a growing hotbed of innovation. For example, Boxabl is emerging as an imminent game changer to the residential sector.

There are a number of options, materials, construction methods and companies from which to choose. We are confident that, as awareness spreads and impressive performance data accumulates over the coming years, the Insurance and Banking industries will treat properties that are deemed “disaster resistant” preferentially.

For example, when comparing two nearly identical properties, with the exception of one deemed “disaster resistant”, the safer property would be classified as more valuable and a safer investment in comparison to the comparable property.

To learn more about prefab homes and disaster resistant technologies, see these articles:

Shipping Container Homes

Full disclosure: we are not advocates of permanent residential homes made from repurposed shipping containers. For reasons and concerns, see our article “What to Consider Before Purchasing a Shipping Container Home”.

However, if you choose this approach to affordability for your homeownership dreams, we suggest you research qualified contractors with a very discerning eye. We strongly recommend hiring one of the very best builders in this space. Building a shipping container home that will last more than one generation is extremely tricky, and the construction must prevent or curtail a myriad of potential failures that can occur with the use of this material.

We feel shipping containers are better suited for mild, temperate climates and for less permanent applications such as recreational or short-term housing. In any case, be sure to research documented experiences of living in shipping containers before making this choice. Here is one example of a Hawaiian homeowners dealing with the aftermath of mold, after returning home from an extended vacation.

Mobile Homes

These are residential structures that can be driven or transported to another location. In this category, we include Tiny Houses on Wheels, Mobile Homes, Motor Homes and Recreational Vehicles (RVs). These house types are another option for those with a more transient lifestyle. Mobile homes have changed considerably over the years, from the cramped, cabins of yore to luxury, lifestyle homes, good enough for affluent celebrities like Kid Rock.

Another factor that can determine if an “ambiguous” structure is classified as “mobile” is if it is NOT attached to a foundation. Getting back to the theme of “land”, a common challenge for owners on mobile Tiny Houses is finding legal places to place their home. Owning land not only enables you to park your own tiny house, but it can also create the opportunity of leasing your land to other tiny house owners.

Loan Types to Consider

Though much progress continues to be made in all forms of residential construction (e.g. energy efficiency, time-to-market, cost, functionality, transformability, durability, etc.), one drawback that all of these unconventional house structures have is that they are more difficult to finance. Though not applicable to every situation, here are the concerns most traditional lending institutions will have when considering financing alternative homes:

They are not attached to the land
The land on which the structure is placed is not owned by homeowner
Few or no financial comparables within the market
Lower appreciation potential than conventionally built homes
Risk of depreciation for some structures (e.g. shipping containers & mobile homes)
Uncertain future risks such as changing consumer preferences (e.g. distinct structural styles may become undesirable)

Keep in mind that a Tiny House on Wheels will have the fewest financing options, as it will likely be classified as an RV (Recreational Vehicle), which in turn will limit where it can be placed.

On the other hand, a Permanent Tiny House (attached to a foundation on land that the homeowner also owns), will have the most financing options, as it will have land as collateral, and can be located in more desirable locations.

With these inherent challenges in mind, here are several financing options to consider for your specific situation.

Conventional Home Loan Mortgage

Fair warning, obtaining a conventional mortgage for some alternative home types is near to impossible. Having mortgage banking experience, we are acutely aware of the problem with conventional mortgages and alternative home types. Simply stated, mortgage bankers are very risk averse, due to the reasons expressed above.

In order to value an alternative home, bankers would need to understand the value of the home in a particular area. If you are the first to build a tiny house or shipping container home in a particular community, it would be difficult for a banker to assess the value based on comparable properties, or “comps”, for that particular area.

This inability to value a home based on others of a like nature in the same area means that bankers are unwilling to take a risk at offering a loan for an “unknown” entity. One other important factor is that you must own the land on which you are building the home, as the banker needs some type of asset to secure the loan.

On the issue of collateral, in the case of a foreclosure, bankers must hedge their risks in the event of non-payment. Shipping containers and tiny homes are known at times to decrease in value, making them more difficult to finance with a mortgage. This is not to say that your alternative home type will not be able to get a conventional mortgage, but certain types are more conducive to getting a conventional mortgage (e.g. prefab modular), while others are less so (e.g. shipping containers, tiny homes, earth berm, straw bale, etc.). Again, to increase your chances of being financed make sure you own the land.

Home Construction Loans

Alternative home types have a better chance of being financed via construction loans, assuming that the final product is bolted to a foundation and connected to utilities on property owned by the borrower. Home construction-only loans are short-term loans that cover the cost of construction of a custom build.

Since most homeowners usually apply for a mortgage to pay for the construction-only loan once the home is built, a construction-only loan makes sense if you can arrange alternative financing after the build is completed to repay the general contractor. The average duration of a construction-only loan is one year, as it is only meant to cover the duration of the ongoing construction project.

Although more expensive than a conventional mortgage, a construction-to-permanent loan converts to a mortgage after the build is completed, as it combines both construction financing and mortgage financing into one loan. While construction is ongoing, borrowers are required to pay only the interest portion of the loan. Once the home is completed, borrowers pay the full interest and principle, as a monthly payment for the term of the loan.

Personal Loans

Perhaps the best way to finance any alternative home type is with a personal loan. This loan type has higher interest rates than conventional mortgage loans, but it is based on your credit history and FICO score. Personal loans can be obtained from a bank, credit union or online lender and can be used for whatever purpose you choose with ample flexibility. Some personal loans are “fee-free” which means that, unlike a mortgage loan, there are no origination fees, pre-payment fees or late fees.

RV Loans

Because the rules of most home mortgage financing stipulate that a home being financed must be on a permanent foundation, Tiny Homes on Wheels are perhaps the most difficult to finance. Couple this rule with the fact that mortgage lenders have minimum loan amounts, and the average cost of a tiny house is between $40,000 and $100,000, you can understand why traditional mortgage financing is typically not a viable option for tiny house enthusiasts.

However, since some tiny homes are mobile or on wheels, they may qualify for an RV or Recreational Vehicle loan. To qualify, the tiny home will need to be certified as an RV by the RV Industry Association. Unlike a personal loan, RV loans have low interest rates and a 15-year term of repayment. You must have a minimum FICO of 660.

Builder/Manufacturer Financing Programs

Many construction companies, who offer to build your tiny house, shipping container or modular home, offer financing via a third-party lender or builder’s financing unit. These companies have already secured relationships with qualified lenders to offer incentives, such as low interest rates, low fees or “preapproved” status, as long as you build with their construction company.

Who is Financing Alternative Homes?

Lending Institutions

Acorn Finance

Headquartered in Sacramento, California, Acorn Finance is a broker that secures lending sources for home loan borrowers, especially Alternative Home Financing, as they offer both Tiny House and Shipping Container financing. The process is 100% online, so there are no voluminous reams of paper to review and sign. Funding occurs in as little as one business day. Although the interest rates appear to be higher than market average, the loan cap is $100,000, with a maximum term of 12 years.

SoFi

SoFi offers a number of loan and financial products via their online application process. With a $100,000 unsecured personal loan maximum, the company does not charge origination, pre-payment or late fees. Should you become unemployed during your loan repayment period (through no fault of your own), they will temporarily pause your payments and assist you in finding new employment during the forbearance period. Terms are a maximum of 7 years.

LightStream

LightStream is a division of Truist, the merger of SunTrust and BB&T Banks, with over $522 billion AUM (Assets Under Management). The company touts “loans for almost anything” and offers loans from $5,000 to $100,000, virtually paper-free using its online platform. LightStream’s financing offerings for Tiny Houses are unsecured loans that have no fees or prepayment penalties and require no collateral.

Cardinal Financial

One of the few, well-established, financial institutions to offer Unique Home Financing, Cardinal Financial does provide loans for modular, manufactured, shipping and tiny homes on a fixed foundation. Cardinal offers conventional, FHA, VA and USDA loans for those who qualify, as long as the structure fully conforms to national building codes and there are two local comparables available. Tiny and shipping container home down payments are 3% and borrowers only need to have a minimum FICO score of 620.

Marcus

Marcus, backed by Goldman Sachs, a well-regarded financial institution, offers both personal and tiny home loans that are capped at $40,000. Borrowers need only have a 660 FICO score to qualify, which only takes minutes via the Marcus app. There are no signup or prepayment fees and borrowers who pay their loans on time and in full for a 12-month consecutive period are rewarded with a “skip a month” option, with no interest accrual.

Upgrade

With personal loans up to $50,000, Upgrade offers one day funding within a day of verifications. With one of the lowest FICO requirements at 560, Upgrade has high review ratings with over 12,000 Trustpilot reviews. Borrowers describe the company as “fair”, “fast-funding”, “hassle -free” and “highly recommended”.

Other Lending Institutions

Builders & Manufacturers

Boxabl

With a new 170,000 square foot manufacturing facility in North Las Vegas, Boxabl is ready to construct their patented modular homes and ship them directly to your property. A low cost, $50,000 ADU that arrives fully equipped with appliances, the Boxable Casita, only requires a foundation and hookups to city utilities. For a full profile on Boxable, see Boxabl: Transformable Design + Automation = Affordable Housing.

Dwellito

Dwellito is a modular home marketplace or “one-stop shop” for all homes, prefab and modular. The site helps home buyers determine the right type of dwelling for their needs and recently announced financing for tiny homes, up to $150,000. The site offers various options for buyers, such as co-investing, interest-free financing and flexible terms and rates. If interested, be sure to sign up for their wait list.

Mighty Buildings

Mighty Buildings, a 3-D printed, prefab home builder, has trusted partnerships with several financial services companies to provide a seamless loan process. Their website lists the following 3^rd-party lenders as current financing partners:

Villa

Villa, formerly Habitat ADU, builds prefabricated ADUs mainly in California. As part of the services they offer, Villa will connect a homebuyer with a loan specialist to help obtain financing for one of the company’s products, for either a traditional mortgage loan or alternative lending option.

Want a Nontraditional House? Here’s How to Finance It!