How to finance a tiny home

As the cost of housing in America continues to skyrocket, downsizing to a micro-living space has become an increasingly popular trend. While tiny houses might have more appeal than traditional homes in terms of affordability, these homes still have their own set of challenges.

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. However, The International Residential Code classifies tiny homes as “400 square feet or less, excluding lofts.”

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
• 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 an existing home in 2023 is $410,200. A tiny house, by comparison, can cost as little as $4,000 and as much as $180,000. 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.

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 home, 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 9.49 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 percent to 36 percent, 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, home equity loans may be a good financing option for you. Adding a tiny home to your property will likely add value to your home’s sale price, so you could recoup your investment when it comes time to put it on the market.

Home equity line of credit

Home equity lines of credit (HELOCs) 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.

Mortgage loans

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.

RV loans

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. The loan terms and rates are often similar to that of other types of financing. However, every manufacturer or builder will have different terms and eligibility requirements.

Before applying, compare multiple options and make sure you meet the minimum credit requirements. 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. However, make sure you compare multiple companies’ financing options to make sure you’re getting the most competitive rate.

Pros and cons of tiny home living

Making a major life change, like moving into a tiny home, requires looking at both the potential advantages and disadvantages. While tiny home living can be a more exciting and frugal way to live, there are downsides to consider as well.

Pros

• Can be far more affordable than a traditional mortgage.
• You’re likely to save money on utilities.
• Simplified living: less clutter, more mobility and flexibility.

Cons

• Your storage is limited. Decluttering may be a challenge.
• Zoning laws and financing can be tricky, depending on your home and where you choose to park or place it.
• Value may not hold up – your tiny home may depreciate more quickly than a traditional house.

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). That being said, it’s 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. However, make sure you spend plenty of time reviewing the numbers before you decide whether a tiny home is right for you.

Tiny home financing FAQs

• How much is a tiny home?

  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.

• Can you get a mortgage for a tiny home?

  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.

• Is a tiny home a good investment?

  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.

• Can I finance a tiny home with bad credit?

  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.