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Tiny Homes: Pros & Cons
Tiny Homes: What Are the Pros & Cons?
The tiny house trend is a big movement. Everyone from millennials to retirees is opting to live small, but that doesn't mean the lifestyle is right for you. Consider these pros and cons before you downsize.
What constitutes a tiny house?
Generally, tiny homes measure between 100 and 500 square feet. Many are portable, but some city ordinances and housing divisions require homes to be set on a foundation.
What are the pros?
People are drawn to tiny houses for a number of reasons. Owners of tiny homes often cite price as the deciding factor. Tiny homes range from $10,000 to $60,000, depending on the manufacturer. Even a top-of-the-line custom unit typically costs less than $100,000.
Other perks include the freedom of mobility and the ability to live more sustainably. There's also the added flexibility to use the structure as a rental unit, add-on expansion or mother-in-law suite.
What are the cons?
Of course, not everyone is willing to contend with the realities of owning a tiny home. For instance, despite their low sales price, there are hidden costs that can sneak up on potential buyers. From construction crew markups and shipping fees to property taxes and plot purchases, the final figure can add up quickly.
What's more, unless you have enough liquid funds to make a cash purchase, financing for tiny homes can be difficult, and there are also obvious drawbacks such as space restrictions that complicate hosting guests and storing nonessentials.
No doubt our collective desire for simplification and financial freedom has birthed the tiny home movement. However, before you commit to one, it's important to educate yourself about the complicated regulations and overlooked nuances of owning a tiny home.
In 1968, mortgage rates were 8.5%. The next year, rates went down to 7%. Homeowners could buy a 15-20% larger home for the same payments if they could find someone to assume their mortgage.
FHA and VA mortgages were very popular in certain price ranges and they allowed anyone to assume the mortgage regardless of the credit. If you could find a person to take over your note, you were free to qualify for another mortgage.
In October 1981, mortgage rates reached 18.63%. A $250,000 mortgage had a monthly principal and interest payment of $3,896.46. As astronomical as that rate sounds, people were still buying homes and were good investments.
Four years later, they were still over 12%. The monthly payment was $2,571.53. Believe it or not, people were excited to be paying only 2/3 what they had to pay a few years earlier.
Fast forward to late 1991 when the rates went below 9% and that same payment was to $2,015.16. At the turn of the 21st century, rates were 8.15% and that made the payment $1,860.62. Not much change in rates during that decade.
If we look around the housing bubble, late 2008, the rates were 6.04% and the payment was $1,505.31. By 2009, mortgage rates had fallen below 5%. The lowest mortgage rate was 3.31% on November 2012 with a payment of $1,096.27.
Rates fluctuated for the next few years until now, and most of the experts are expecting them to be above 5% by the end of 2018. Rates have increased each week for the last six weeks to 4.38% with payments of $1,240.12.
The average mortgage rate for the past 47 years is a little over 8%. The real estate and mortgage markets are cyclical. Rates have been historically low for a long period but will probably continue to rise. Most buyers don’t pay cash and mortgages enable them to purchase now. Based on history, even 8% would be an excellent rate. Until it reaches that point again, everything lower is a bargain.
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FHA Is A Good Option
FHA insured mortgages serve a sector of the market that is not necessarily being met by other loan programs.
Securing an 80% conventional mortgage that doesn’t require mortgage insurance may be the lowest cost of financing but if the buyer doesn’t have 20% down payment, it isn’t really an option.
Securing a 100% VA loan doesn’t require a down payment or mortgage insurance but if the buyer isn’t a veteran with his/her eligibility intact, it isn’t an option either.
There are conventional loan programs with as little as 3% down payment but they not only require mortgage insurance, they also require a credit score of 740 or above which may eliminate some buyers.
For these reasons, FHA is a viable alternative to about 20% of new and existing home sales. The Federal backing of these mortgages makes it easier for first-time and low-income buyers to qualify because the requirements are not as demanding. They’re even more lenient towards buyers who have previously experienced bankruptcy, foreclosure or a short sale.
Finding the right mortgage for the right home is a team effort where both mortgage and real estate professionals work in harmony to get a buyer into their own home. Call us at (239) 280-2225 for a recommendation of a trusted mortgage professional.
General FHA loan requirements include:
-The loan is for primary residences only but can include two, three or four units.
-The property must be appraised by an FHA-approved appraiser.
-The property must be safe, sound and secure, in compliance with minimum property standards as defined by the U.S. Department of Housing and Urban Development.
-The borrower must be a legal resident of the U.S. and have a valid Social Security number.
-The minimum credit score of 580 with a down payment of at least 3.5 percent, or a minimum credit score of 500 with a down payment of at least 10 percent.
-The borrower may not have delinquent federal debt or judgments, or debt associated with past FHA loans.
-The borrower must have steady employment history.
-Documentation is required if the down payment was gifted by a family member.
-The borrower must have a debt-to-income not exceed limits of 31% for front-end and 43% back-end ratio (some exceptions may apply).
-Any judgments or collections on the credit report must be resolved or satisfactorily explained.
Pre-Approval Is Good For Everyone
Buyer’s mortgage pre-approval is good for everyone in the transaction. It saves time, money and removes the uncertainty of knowing whether the buyer will be qualified after negotiating a contract. The direct benefits include:
Looking at “Right” homes - price, size, amenities, location
Find the best loan - rate, term, type
Uncover credit issues early - time to cure possible problems
Negotiating power - price, terms, & timing
Close quicker - verifications have been made
There is a significant difference in having a trusted mortgage professional take a loan application and run all the necessary verifications compared to going through calculators on a lender’s website. Beside the peace of mind, the cost of being pre-approved is a bargain and generally, limited to the cost of the credit report.
Even if a person has been pre-approved, a second opinion from a different lender may be a good option. It can verify there is a good deal or you’ll discover that you can improve it. Either way, it works to your advantage. Contact me if you’d like a recommendation of a trusted mortgage officer.
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