As noted in the article, the current mortgage situation isn't good at all.
I wanted to buy land a couple of years ago, to build a tiny house on. I went in willing/able to put a 30-40% down payment on the property, with plans to build my own tiny house completely self-funded over the next year or so. The banks were simply not at all equipped to address that. Despite my excellent credit (high 700s) and low debt, and the cash to make the down payment and good income, they made it clear that I would be able to get a loan on a regular sized house with much less money down, but would not be able to get a loan on just a piece of land with plans to put a tiny house on it.
They were also willing to talk about loaning money for the land, if I could show how I was going to afford to build a "regular" house on the property (requiring going through a builder and getting a loan on the future house). In short, the was no way, short of paying for the property entirely out of pocket I would be able to buy land and build my own tiny house on it.
It was incredibly frustrating. I mean, I'm talking to these folks and they are, with a straight face, saying, "Well, as a first time home buyer, you could put 5%-15% down and buy a house, with the bank loaning you the other ~$160,000." And, I'd say, "OK, but what if I put $25,000 down, and only borrow $50,000 from the bank, and buy a piece of land, and over the next year I build myself a house on that land." And, they'd reply, "That's just not gonna happen."
So, several banks would have been happy to loan me $160k with $16k down on a full-sized house, but no one was willing to loan me $50k with $25k down on land for a tiny house.
I gave up on buying at that time. Will save up and pay cash for a plot of land in another year or two, and build my tiny house then.
I doubt it will change any time soon. Home builders have no motivation to build smaller, banks have no interest in betting on self-built homes. Which is understandable to some degree...but, the sheer hardheadedness of the response was really surprising, to me. I'd always assumed I would have no trouble getting whatever kind of loan I wanted, as long as I brought enough cash to the table. But, for land-only deals, many banks want to see 50% or more down payment, which is silly.
So, tiny houses remain mostly the privilege of those wealthy enough to afford to buy land without a mortgage, or those who don't mind living in places where land is very, very cheap. It's also possible to park a tiny house in a trailer park or RV park (and I know some folks who do that), but that misses the point of home ownership, for me.
If you're interested in knowing why, it's because mortgages are sold as securities these days (and have been since before the Big Collapse). If your mortgage is significantly not like the other mortgages, it can't be bundled and sold into the pool of other securitized mortgages. That means your lender has to carry the note itself and the overwhelming majority of lenders--banks and brokers--don't do that.
The other problem: banks need a property that, if foreclosed upon, can be sold to recoup their investment. A friend of mine is having this exact problem. He has a house that could withstand a bomb being dropped on it but it is built to his preferences and the banks he has visited to inquire about refinancing have all said that a sale would be difficult. Too risky to use as collateral since they can't be relatively certain of recovering against loss.
What you're looking for is a "portfolio loan," where the financial institution keeps your loan on its own books. Some credit unions do this (mine does) in situations like yours. The interest will be commensurate with the credit union's guess of how easy your property will be to resell (both in the opinion of the underwriter and of the outside, independent appraiser) to pay for the risk but it can be done.
Thanks for the explanation, and it mirrors the explanation I got from the loan officer at my credit union.
On this point:
"What you're looking for is a "portfolio loan," where the financial institution keeps your loan on its own books. Some credit unions do this (mine does) in situations like yours. The interest will be commensurate with the credit union's guess of how easy your property will be to resell (both in the opinion of the underwriter and of the outside, independent appraiser) to pay for the risk but it can be done."
It was the credit union that said, "We could maybe get you a loan on the land if you can put 50% down." The bank I've been using for 20 years flat out said "no way, we only do land loans for businesses for new construction, and they have to have a plan and funding lined up to complete the construction".
It all seems vaguely rotten and corrupt, to me...but, well, I don't know the motivation for it. I'll just keep saving, and pay cash. Or maybe I'll buy land where it's cheaper. Maybe I won't always value living within biking distance of a city with good live music as highly as I do now.
Basically, as parent said, they're concerned that doing something oddball with the land will actually decrease its value or at least have some unknown effect on its value that they have no experience to evaluate.
Add to that, post-2008, most banks/credit unions are just going to err on the side of just not making the loan rather than making one which has some unquantifiable risk associated with it.
That said, it's all a bit arbitrary. I live in a relatively normal house on some very nice property but the house has enough quirks (it's very old) that I fully expect that whoever buys it some day will just build a new house.
Normal House: $100,000
Resale at: $75,000 to $125,000
* Next owners may want it removed
A $50,000 loan doesn't make sense / is too risky.
I know the above is grossly over simplified, and there's hundreds to thousands of factors going into a risk / valuation but currently banks aren't equipped to handle tiny homes, not to mention the market for them isn't as big yet to justify it.
I think you're assuming I was trying to get a loan to build the house. The loan was for the land itself, and I planned to self-fund the house construction. So, I was looking at property that cost around $75k, and was hoping to get a loan for $50k of that (with $25k down). The tiny house was not at all part of the equation on the loan (except in the sense that had I been planning to put a big house on the land and was contracting a home builder to do it, the bank might have treated it more like a regular house and been willing to loan me money).
But, yes, part of the problem is that land has much less predictable resale value than houses, and that was the usual answer I got when being told, "No".
That loan situation sounds incredibly frustrating. The banks are like, "come on man, it's cool, borrow more money from us," because that's in their interest ... but if you don't wanna play by their rules, then you get shot down.
Sorry to hear it -- both "sorry" in the sense that I wish it hadn't happened to you, and sorry because I myself have had pipe dreams of buying my own land and building on it, so here is some evidence against that being possible.
>have had pipe dreams of buying my own land and building on it, so here is some evidence against that being possible.
It's certainly possible and people do it all the time. But it's more complicated and will usually require more cash in hand than a standard home mortgage will.
I wanted to buy land a couple of years ago, to build a tiny house on. I went in willing/able to put a 30-40% down payment on the property, with plans to build my own tiny house completely self-funded over the next year or so. The banks were simply not at all equipped to address that. Despite my excellent credit (high 700s) and low debt, and the cash to make the down payment and good income, they made it clear that I would be able to get a loan on a regular sized house with much less money down, but would not be able to get a loan on just a piece of land with plans to put a tiny house on it.
They were also willing to talk about loaning money for the land, if I could show how I was going to afford to build a "regular" house on the property (requiring going through a builder and getting a loan on the future house). In short, the was no way, short of paying for the property entirely out of pocket I would be able to buy land and build my own tiny house on it.
It was incredibly frustrating. I mean, I'm talking to these folks and they are, with a straight face, saying, "Well, as a first time home buyer, you could put 5%-15% down and buy a house, with the bank loaning you the other ~$160,000." And, I'd say, "OK, but what if I put $25,000 down, and only borrow $50,000 from the bank, and buy a piece of land, and over the next year I build myself a house on that land." And, they'd reply, "That's just not gonna happen."
So, several banks would have been happy to loan me $160k with $16k down on a full-sized house, but no one was willing to loan me $50k with $25k down on land for a tiny house.
I gave up on buying at that time. Will save up and pay cash for a plot of land in another year or two, and build my tiny house then.
I doubt it will change any time soon. Home builders have no motivation to build smaller, banks have no interest in betting on self-built homes. Which is understandable to some degree...but, the sheer hardheadedness of the response was really surprising, to me. I'd always assumed I would have no trouble getting whatever kind of loan I wanted, as long as I brought enough cash to the table. But, for land-only deals, many banks want to see 50% or more down payment, which is silly.
So, tiny houses remain mostly the privilege of those wealthy enough to afford to buy land without a mortgage, or those who don't mind living in places where land is very, very cheap. It's also possible to park a tiny house in a trailer park or RV park (and I know some folks who do that), but that misses the point of home ownership, for me.