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How to Finance a Tiny House
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Buying a tiny house is a way to downsize your environmental footprint without sacrificing homeownership. Joining the tiny house movement has many pros and cons, but lean living doesn’t always come cheap. From paying all cash to taking out a personal or recreational vehicle (RV) loan, there are many ways to pay for a new tiny home. This article will cover the ins and outs of tiny homes and how to secure tiny home financing.
What is a tiny home?
A tiny home is smaller than an average dwelling, but the sizes of tiny homes vary. On average, most tiny homes are between 100 to 400 square feet, although some are slightly bigger and some slightly smaller. They usually come with a kitchen or kitchenette and a bathroom, plus sleeping and living areas – just like a regular home, but miniaturized.
Tiny home living has been popular for decades; even the COVID-19 pandemic didn’t stop Americans from purchasing and constructing tiny houses. In fact, according to a 2020 report, 56% of Americans would consider living in a tiny home, and the trend continues worldwide. The market is poised to expand to $5.80 billion by 2024.
Some tiny homes have wheels and can be hitched to a vehicle. Some are built out of a retrofitted trailer or even converted storage containers. Tiny homes can be built out of practically any type of material, and there isn’t an industry standard for tiny homes. If your tiny home sits on a fixed foundation, you will have to own or lease the land underneath it, which can be costly.
Types of tiny homes
- Tiny traditional homes: Traditional tiny homes resemble their larger cousins and can reflect architectural styles like modern, Victorian, cottage or cabins. While building materials may vary, they usually include lumber, concrete, plywood and more. They are built on a foundation, like any other home.
- Tiny house on a trailer: While they may resemble a traditional home, some tiny homes sit on trailers so they can be moved if the buyer wants a change of scenery. These houses are usually built out of traditional materials, although they may be smaller than other tiny houses to rest comfortably on four wheels.
- Park models: A park model is a form of pre-built trailer home designed to look like a house. They are considered recreational vehicles and are used with permanent or long-term placement in a mobile home or RV park. They must remain under 400 square feet (as per U.S. regulations) and most have ground anchors. Park models are built to mobile park home specifications.
- Container home: Container homes are often modern-looking dwellings built out of shipping containers or semitruck containers. Buyers can customize the inside of their container home, adding insulation, walls, plumbing and electrical. Windows, doors and even decks can be added to the exterior of the container. They are not necessarily cheap; like most tiny houses, they may start affordable and end up expensive.
Pros and cons of tiny living
Downsizing to a tiny home presents many opportunities to save money and reduce clutter, but the move also means losing space and privacy. The cost to build a tiny home can add up quickly, especially if you need land to build on, but it may still be less expensive than a traditional home.
Less to clean, freeing up your time
Lower utility and maintenance costs
Opportunity for savings
Freedom to travel (if your home is on wheels)
Tiny home regulations and laws vary widely
Generally not eligible for a traditional mortgage
May not have room for guests
Some RV parks don’t allow them
Lack of space and privacy (especially for families
Land to build on can be expensive
How much do tiny houses cost?
The price of a tiny house can vary wildly depending on the type of home and how it is constructed or purchased. There are three paths to tiny home ownership: building it yourself, hiring a tiny home builder or purchasing a prefabricated or “prefab” tiny home from a seller. The cost can range from a few thousand dollars to renovate a storage shed to well over $100,000 for a custom-built home with luxurious amenities. Not only do you have to factor in the cost of building your tiny home, but you may also have to purchase land.
The DIY approach could cost you anywhere from $14,000 to $54,000 or more in materials. If doing the work yourself isn’t appealing, there are many expert tiny home builders who will construct your dream home and deliver it to you, but it’ll come at a steeper price. Tumbleweed Tiny Homes, for example, offers four model builds that range in price from $85,000 to $125,000. Another company, Tiny Home Builders, can either build you a tiny home or backyard studio or sell you plans to build it yourself. You can purchase pre-built tiny homes that cost anywhere from $40,000 to well over $100,000 by searching Tiny Home Builders’ Marketplace.
The buck doesn’t stop after your home is constructed. Delivery fees could add thousands of dollars onto the total cost, depending on the builder and distance the home needs to be shipped. If you buy land for your tiny home, the price will depend on the acreage and location.
Financing options for tiny homes
There are a few ways to finance your tiny home if you can’t afford to pay cash. Personal loans, financing through a builder, taking out an RV loan or borrowing against the equity on your home are common tiny home financing options. Some online lenders even specialize in tiny house loans, so it is worth shopping for rates.
If you want to finance a tiny home with a personal loan, you will likely need very good to excellent credit (at least 670 or higher) to get the best rates. If you can pay for most of the house with savings, you could use a personal loan to finance the rest. Some lenders, such as LightStream, offer personal loans designed for purchasing a tiny home for up to $100,000. If you want their lowest annual percentage rate (APR) of 5.73%, you will need excellent credit. The repayment period is shorter than a typical mortgage – only seven years. Depending on the lender, personal loans may come with additional fees, which could increase the total cost to borrow and impact your monthly payment. Generally, your debt-to-income (DTI) ratio should be at or below 35%.
If your tiny home is built on or rests on a trailer, you may qualify for an RV loan. The home will need to be road-worthy as if it were a recreational vehicle. RV loans are commonly offered by banks, credit unions and online lenders. If your tiny home is certified by the Recreation Vehicle Industry Association, you may have an easier time qualifying for an RV loan. SunTrust Bank, for example, works with certified tiny home builders and sellers.
Depending on your credit score and other factors, you could qualify for an RV loan with an APR as low as 3.99%. Like other vehicle loans, rates and monthly payments are usually a fixed amount over the life of the loan, which is typically five to 10 years.
Some professional tiny house builders offer in-house financing. If a builder provides its clients with financing options, the company will set the terms. As with any loan, rates and terms are based on creditworthiness.
For example, Tiny Heirloom builds and ships custom models, along with offering previously owned tiny homes. Tiny Heirloom also provides customers an opportunity to finance their purchases using fully amortized principal and interest payments for up to 23 years. Tiny Heirloom requires a down payment of 5% to 30%, depending on income. Borrowers may receive an APR as low as 4.25%.
Tumbleweed Homes, on the other hand, requires a down payment between 1% and 20% and offers tiny home financing for buyers with credit scores as low as 575.
Home equity loan
If you own a home with enough equity for a home equity loan or a HELOC, you could use your equity to purchase a tiny home. Most home equity and HELOCs require a credit score of at least 680, plus proof of income, and the terms will be based on the amount you borrow. You can usually borrow up to 85% of the equity in your home. The serious risk of using a home equity loan or HELOC is that it is a secured loan; if you cannot repay the loan, the home used as collateral could be seized by the bank.
While it is possible, finding a mortgage lender for a tiny house can be very challenging. Some online lenders, like LightStream, offer personal loans specifically for tiny houses, but these loan products are not the same as a traditional mortgage. If you apply for a mortgage with a lender, your credit score, annual income and DTI ratio will all be considered. To qualify, most mortgages require that the house be built on a foundation and meet specific square footage threshold. For example, to be considered for an FHA loan, the home must be at least 400 square feet. If you want to downsize but need to use a traditional mortgage, searching for smaller traditional homes or cottages might be more cost-effective, even if they don’t look like a typical “tiny home” build.
What to know before financing a tiny home
When you are searching for tiny home financing, you can follow the same guidelines as any type of loan. First, determine how much you can afford to borrow and work on improving your credit score. Next, get offers from several lenders and compare the offered APRs and repayment terms to find the best deal. Make sure to pay attention to any fees that accompany your loan. Remember that the total out-of-pocket cost will go beyond the home itself. For example, you may need to buy land or pay docking fees at an RV or mobile home park. You will also need to move your things into a tiny home, plus you may be interested in higher-end (and therefore more expensive) amenities.
You need land to build on. If you want to build a permanent structure on a piece of land, you must purchase the land first. It is important to note that not all areas allow for the construction of a tiny home. Once you decide where you want to buy land, you’ll need to determine the zoning regulations for building a home. These can vary greatly from urban to rural areas, and from state to state.
Consider the hidden costs. Don’t neglect to budget for hidden costs like storage for your possessions that are too big for your new tiny home. Blueprints for the DIY projects, inspection and zoning fees, certification of your RV home and hiring a plumber or electrician if you are building your tiny home can all increase the total cost to own.
You may need a way to move it. If you are purchasing a tiny home on a trailer or purchasing a park home, you will need to have a vehicle capable of moving it from place to place.
Furnishing can be tricky. A tiny house may need built-ins and/or customized furnishings. Small murphy beds can be a good solution if you have adequate floor space. Pull-out couches can pull double duty. Smaller versions of traditional furniture, such as using an end table as a desk or a bench as dining room seating, can also work.
Tiny home financing: FAQ
Can I get tiny home financing with bad credit?
Like any loan, the best APRs and terms are approved for borrowers with the best credit. There are lenders who offer bad credit personal loans, but it is always a good idea to work on improving your credit score before taking out a loan. You can request a free copy of your credit report from each of the credit bureaus by visiting AnnualCreditReport.com.
Is a tiny house a good investment?
If you want to live in a tiny house and can afford the payments, it can be a good investment. It may save you on mortgage payments, utilities and upkeep. You can sell a tiny house, but it is unlikely to build equity in the same way as a traditional home, although the land under it may appreciate.
Can I get a mortgage for a tiny home?
Probably not. Mortgages are notoriously hard to get for tiny homes. However, you can get a mortgage for a small house if you simply want to reduce your home’s footprint. Tiny house financing can also be done through a tiny house builder or a lender specializing in tiny house loans. Some of them may have 20-year terms, making them similar to a mortgage.