Personal Loans

Tiny House Financing: Compare Your Options

tiny house financing

People are embracing a minimalist, sustainable lifestyle by joining the tiny house movement, but tiny living isn’t for everyone ー especially since financing can be tricky.

If you want to learn how to live larger in a smaller space, learn all about your tiny house financing options: mortgage loans, personal loans, RV loans and home equity loans.

Why you likely won’t qualify for a traditional mortgage loan

Mortgages for tiny houses are limited. If you were to buy a “tiny” house on a mortgage, it would have to be larger than a tiny house by definition. That’s because you have to get your house appraised, and appraisal value is determined by comparable homes in the same area. And you aren’t likely to find any comps that are similar in terms of square footage.

A mortgage also requires that you live in a house with a foundation, so if your tiny home is on wheels, then you’re out of luck. To qualify for a mortgage, you need to own the land that the house is on, as well as the house itself. If not, your dwelling would fall under the category of a mobile home or RV, not a house.

Types of financing available for buying a tiny home

By definition, a tiny house is a dwelling that’s less than 400 square feet in size. That’s about the only real constraint there is when defining a tiny home. But tiny houses come in many different shapes and sizes.

A small, in-law suite may qualify as a tiny house, and even a shipping container retrofitted with a bathroom and kitchen could be considered the same. Some tiny houses are mobile – on a trailer – while others are on a foundation. All of these factors will ultimately affect which kind of financing for which you’re eligible.

In most cases, you likely won’t be able to secure a mortgage for a tiny home. Here are a few financing options that you may consider:

Personal loans

You can use a personal loan to pay for just about anything, which makes getting one much more simple than securing a mortgage. Plus, they have shorter repayment terms, so you could pay off the home in the span of a few years.

Personal loans are unsecured, meaning you don’t have to put up collateral. This basically gives you the funding you need with no strings attached: No complicated mortgage jargon, like worrying about a home appraisal or comps.

However, because the loan is guaranteed by your promise to pay back the lender, you’ll need a good credit score to get a low interest rate. In general, interest rates are higher than with secured financing, and a personal loan might not be enough capital to buy the tiny home you want. Still, this is a feasible financing option for people who want to buy a tiny home but don’t have the capital to buy it in cash.

Pros

  • You can get the funding you need with little constraints, unlike a mortgage
  • You can pay off the loan in a few years
  • Your interest rates and monthly payments are fixed
  • There’s no collateral, and no risk of foreclosure

Cons

  • You may pay higher interest rates than with secured financing
  • Borrowers with lower credit scores will have a hard time qualifying
  • You may have to pay an origination fee or prepayment penalties
  • A personal loan may not be big enough to cover the costs of a more expensive tiny home

RV loans

Tiny homes built on wheels and certified by the Recreation Vehicle Industry Association may qualify for RV financing. This type of funding uses your RV (or in this case, tiny home) as collateral for the loan. Because the loan is secured by collateral, you may be able to secure lower interest rates than you would with an unsecured personal loan.

Lenders will analyze your credit score, debt-to-income ratio, collateral and down payment to determine if you are eligible for this type of loan. Use LendingTree’s RV loan calculator to get an estimate of your monthly payments with this financing option.

Pros

  • RV loans may have lower interest rates than unsecured personal loans
  • You may be able to borrow up to $100,000 or more

Cons

  • You can only use an RV loan if your tiny home is roadworthy
  • Since your tiny home is used as collateral, you risk it being repossessed if you default on the loan

Home equity loans

A home equity loan or home equity line of credit requires that you borrow against the value of a property that you already own. Translation: You won’t be able to buy a tiny home on a home equity loan if you plan on ditching your mortgage, or if this is your first real estate investment.

Home equity loans work for people who want a tiny home as a vacation home, an in-law suite or investment property. A big drawback to home equity loans is that you’ll have to pay closing costs, and that you risk losing your home to repossession if you default on the loan. However, this may be a solid financing option for well-off homeowners who need the financing to add on to their current real estate.

Pros

  • You may qualify for lower interest rates than you would see with unsecured financing, like a personal loan
  • You can borrow as much as your equity in your first home
  • Home equity loans offer fixed interest rates with predictable payments

Cons

  • You’ll have to pay closing costs, such as an appraisal fee, legal fees and a notary.
  • You can only finance a second home using a home equity loan, so this option won’t work for first-time homebuyers
  • You risk losing your house to foreclosure if you default on the loan

Things to consider when buying a tiny house

Finding land for your home

Zoning restrictions for tiny houses will vary by jurisdiction. So before you plan on putting down roots in a tiny home, make sure you know the laws in your area. And don’t move your tiny home to a new location without first doing your research.

For example, the local government of Charlotte, N.C., doesn’t allow certain types of tiny houses, like tiny homes on wheels, within city limits. But you can go just outside of city limits to more rural areas if you want to live in a mobile tiny house legally. You can build a tiny home in an unincorporated area (i.e., where mobile homes are typically permitted) in some places, like El Paso County, Colorado.

Some states, like California, have passed legislation to make it easier to build second dwellings on property; however, this would mean that you’d have to own a plot of land with property already on it to take advantage of this regulation.

You’ll have to call your local zoning ordinance first to ask if there are any restrictions on areas you’re considering moving to. And once you find the perfect location, you have to go out and buy or rent land, too.

Insuring your tiny house

In most cases, tiny houses aren’t required to have insurance by law, unless you plan to move them on the road ー in which case you need liability insurance. You may also need insurance if you plan on financing your tiny home through a loan, and you’ll definitely need insurance if you secure a mortgage.

It’s a good idea to insure any asset of such high value, even if that’s just $25,000 for your tiny home. That way, you have a financial safety net in case anything were to happen to your house. The average cost for tiny house insurance is $852 per year.

When you’re ready to start shopping for insurance, you’ll need to figure out a few things:

  • Do you plan on moving the house while you live there? You might consider getting RV insurance, which will also cover your home while it’s parked.
  • Do you plan on staying put on a foundation? You could get manufactured/mobile home insurance. This will cover your structure as well as the property within.
  • Do you plan on building your tiny home yourself? It might be harder to secure insurance. You could try to qualify for insurance from an agency that specializes in tiny homes.

Custom-built tiny homes vs. DIY builds

Some luxury tiny homes cost upwards of $150K or more. If you buy the materials and a tiny home plan, you could pay a fraction of the price: approximately $15,000 to $20,000 for a 20-foot long tiny home, according to the Tiny Home Builders blog.

However, building your tiny house yourself comes with other limitations. You might find it harder to secure insurance or funding if you don’t build a house that’s up to code.

For your tiny house to be considered up to residential code, you’ll need:

  • Plumbing, plus a separate bathroom.
  • A minimum ceiling height of 6’8” for habitable spaces and hallways, and 6’4” for bathrooms and kitchens.
  • Stairs or a ladder, if there’s a loft bedroom. You’ll also need loft guards, sort of like a handrail.
  • Emergency exits, including roof access windows and regular windows.

Plus, you have to think about the time commitment of building your own tiny home. Make sure you have the skills required to complete such a complicated construction project. Building a tiny house is a big undertaking.

 

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