How to finance a tiny home
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Downsizing to a micro-living space is an increasingly popular trend in housing. The idea of tiny homes in large part stems from growing environmental and financial concerns, along with the desire to pursue a more minimalist lifestyle in today’s busy world. While tiny houses might have more appeal than traditional homes in terms of affordability, these homes still have their own set of challenges. The process of applying for tiny home financing is complicated and continues to evolve to catch up with market trends.
Many traditional home loans aren’t compatible with tiny house financing. If you’re thinking about making a major lifestyle switch from a large home to a tiny home, you’ll need to know which types of financing can be used as tiny house loans and the requirements for approval.
What is a tiny home?
While there is no official definition of a tiny home, tiny living enthusiasts generally recognize free-standing small living spaces to be tiny houses.The Tiny Home Builders define these homes as “sized under 600 square feet.”
Tiny homes tend to offer the same amenities as full-sized homes: a bedroom or two, a kitchen, dining area, living space, bathroom and some kind of storage. Many tiny homes offer a patio or outdoor living space as well.
It is important to note that the tiny living movement is about more than just the house; followers tend to align with a lifestyle that focuses on minimalism, simplified living and environmental consciousness. Many people choose tiny living in an effort to keep debt to a minimum or avoid the burden of a traditional mortgage.
Common types of tiny homes include:
- Tiny homes on wheels
- Tiny homes on foundations
- Small motorhomes and vans
- Shipping containers
- “Granny pods,” in-law apartments and carriage houses
Average cost of a tiny house
Part of the appeal of tiny houses is that they often cost much less than a traditional home. The average sales price of a newly constructed home in the United States is about $408,000 as of 2021. A tiny house, by comparison, can cost as little as $8,000 to $45,000. The price you pay for a tiny home depends on its size, the materials and upgrades and whether the labor is done yourself or by professionals. Some people pay as much as $150,000 for highly customized and more elaborate tiny homes. Building a tiny home gives you much more control over the final price tag depending on the choices you make and whether you do the work on your own.
Still, the price difference is due to sacrificing a lot of the conveniences that come with larger homes. Tiny homes are typically under 600 square feet, and the average size is a mere 225 square feet. The average single-family home, on the other hand, is 2,261 square feet. And when measured by square foot expense, tiny homes can actually be more costly at about $300 to $400 per square foot, By contrast, single-family homes are, on average, $122 per square foot.
Tiny home financing options
Because the purchase price for tiny houses is significantly less than a single-family homes, traditional home loans might not always be the best option for financing. Luckily, there are other types of financing available.
Personal loans for tiny homes
Personal loans are the most flexible tiny house loans available. They can be taken out in just about any amount, from $1,000 to $100,000, and can be used for nearly anything. Personal loans are generally unsecured, too, which means you won’t lose your dwelling if you aren’t able to make payments on the loan.
Some lenders offer personal loans specifically designed for tiny home purchases. LightStream, for instance, offers fixed-rate tiny home financing starting at 9.99 percent when you sign up for autopay. The lender even promises you can have funding in your account on the same day you apply for the loan.
To obtain the most favorable rates on a personal loan, however, you’ll need a good credit score. Interest rates can range from 5% to 36%, depending on your credit profile. If your credit history has a few blemishes, you may be better off choosing a secured loan with a lower interest rate.
Home equity loans
If you already own a home and have built up equity, certain types of tiny home financing can be done through a home equity loan. As a prerequisite, you’ll need to have enough equity built up into your home to borrow against. Lenders often enforce minimum loan amounts, so using your equity to relocate to a low-budget micro-dwelling might not be the best use of a home equity loan.
If you’re adding a tiny home to the property as a guest house or in-law suite, however, this could be the loan for you. Adding a tiny home to your property will likely add value to your home’s sale price, so you’ll eventually recoup your investment when it comes time to put it on the market.
Home equity line of credit
Home equity lines of credit are similar to home equity loans. Both are secured against your home and are funded by the equity in the property. The difference is that HELOCs work like a credit card, allowing you access to a line of credit with a set limit that you can withdraw funds from as needed.
HELOCs are an ideal option for DIY tiny home financing because you can withdraw small amounts to fund each step of the build, taking only what you need when you need it. This reduces the amount you need to pay back and will help keep your interest payments to a minimum. Keep in mind, though, that a HELOC is secured against your home, so if you don’t pay it back, you risk losing your home.
In most cases, tiny homes won’t qualify for mortgage loans, but if the blueprints meet all your bank’s prerequisites for a home mortgage, it could be a tiny house financing option. In general, though, a home needs to sit on a foundation and be a minimum square footage to qualify, but it’s still worth a phone call to your bank to ask.
Anyone who’s traveled in an RV knows that they’re basically tiny homes on wheels. In fact, some mobile tiny homes may meet all the standards to be classified as an RV, which would qualify them for an RV loan. The main issue with that, though, is that you generally can’t get an RV loan if it’s intended to be your primary dwelling. If you’re financing a tiny house to live in part time, however, this could be the loan for you.
Manufacturer or builder financing
Some tiny house builders offer financing as part of their overall package.
For example, Colorado-based Tumbleweed Tiny Homes is among the builders offering financing to prospective buyers. The company works with lenders to provide first or second loans for buyers. Interest rates on loans offered through Tumbleweed vary from 6.5 percent to 12 percent and loan terms can be as long as 15 to 25 years. The company’s lenders work with applicants who have credit scores of 575 or higher. In order to obtain a loan from Tumbleweed, applicants must be able to make a down payment of between 10 percent and 20 percent.
Tiny Heirloom is another home builder that offers financing. For those who meet credit requirements, loans are available with terms of up to 23 years. A down payment of 5 to 30 percent is required. Interest rates start as low as 4.25 percent.
If you can find a tiny home builder that offers this kind of financing, it may be easier to get the money you need for your home.
Pros and cons of tiny home living
What to know before financing a tiny home
There are several options available for financing a tiny home, from borrowing a personal loan or traditional mortgage to financing an RV loan, if your home is on wheels. It is critical to do your research before investing to see what kind of financing your new home will be eligible for.
If your tiny house is on wheels or built using a trailer, it may not qualify for a traditional mortgage. Be sure to inquire with your builder to see what kind of financing options may be available to you.
Before financing a tiny home, understand that it may not appreciate at the same rate a traditional piece of real estate might. Some tiny homes depreciate quickly, similarly to a car or truck, so you are not guaranteed a return on your investment.
You may also need to finance real estate to park your tiny home on, depending on the zoning laws in your area. Keep in mind that land for your house may be an additional expense you need to factor in.
Tiny home considerations
Tiny homes may be a good fit for some homeowners, but there are some unique considerations you should take into account before buying one, including:
- Depreciation vs. appreciation. Most homeowners expect their home to appreciate over time, which will hopefully fetch a higher price at resale. This hasn’t been the case with tiny homes, however. In fact, your tiny house could depreciate in value, similar to a car or RV. If you intend to sell your micro unit a few years after buying it, you could end up taking a hit on the home price. You could also end up owing more on the remainder of the loan than you get from the sale, which would put you underwater on your loan.
- Zoning laws. If you’re planning on buying a tiny home, you should look carefully into local zoning laws, including square footage limitations, construction codes and any permits you might need to apply for prior to starting your build. These can all add a considerable cost to your project and should be considered into the total cost before financing a tiny house.
The bottom line
If the minimalist lifestyle is calling your name, there are many different tiny home financing options at your disposal. Spend plenty of time reviewing the numbers before you decide whether to build the tiny home of your dreams. Hidden costs can drive up the price and make it difficult to pay off your loans without going underwater on them, which might deter lenders from letting you borrow in the first place.
Tiny home financing FAQs
Tiny houses can cost as little as $8,000 to $45,000. It is possible to run up a bill quickly, though, depending on your floor plan and selected materials. Some models with luxury finishes can run as high as $150,000 or more.
Yes, it is possible to borrow a mortgage for a tiny home – though many tiny homes do not qualify for mortgage financing. Lenders tend to require a traditional foundation and minimum square footage for mortgage loans, so check with your builder to see if your floor plans meet the criteria.
A tiny home can be a good investment, depending on your lifestyle and long-term plans. Tiny living can be a great choice for families that want to stay out of mortgage debt or have a home that is highly mobile. Be mindful of the fact that a tiny home is not the same kind of investment as traditional real estate and may depreciate more quickly.
It is possible to finance a tiny home with bad credit. You may find that living in a tiny house is more attainable than a traditional mortgage if you have bad credit. Research and compare loans with the knowledge that your interest rate may be higher if your credit score is fair or poor.