How to get tiny house financing

What is a tiny home?

While tiny homes come in all shapes and sizes — most are under 600 square feet in size and may or may not be attached to a permanent foundation. Tiny homes are ideal for buyers who want to simplify and don’t need a lot of storage space for belongings.

According to the National Association of Realtors, tiny homes cost 80% less than a traditional home and only use about 7% of the energy consumed by a traditional home.  This makes them a more environmentally friendly option in some ways than a traditional home, in addition to keeping living and maintenance costs low.

But tiny homes may be classified as a temporary structure and also face zoning challenges in many counties to qualify as a legal dwelling. In some municipalities, you may not be able to build a tiny home as a permanent home.

These legal challenges may also pose an issue when you look to finance your tiny home. Many lenders won’t offer a traditional mortgage for your tiny home — with minimum loan amounts and requirements that may prevent borrowers from obtaining a traditional home financing.

This means you’ll most likely need to find other financial options for the purchase of your tiny home.

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Types of tiny homes

There are several types of tiny homes to choose from — each with its own benefits and drawbacks. Here are a few of the popular types of tiny homes to choose from:

• Recreational Vehicle (RV): RVs are popular for full-time travelers—with many offering most of the amenities of a home with the ability to travel easily. RVs come in many sizes and styles, including motorhomes, fifth-wheels and travel trailers.
• Traditional tiny home: Traditional tiny homes are typically built with wood framing and are more akin to a standard home but a lot smaller. Traditional tiny homes are usually finished with insulation and drywall and have creative storage solutions to pack your life into a tiny space. These homes may have wheels or be built on a permanent foundation.
• Container home: Container homes are made from old shipping containers — with builders repurposing the container shell as the exterior of the home — and retrofitting the inside with home amenities. Some container homes use several containers to build a larger structure.
• Natural material homes: Natural material homes use recycled or natural materials to build the structure. This may include cob (clay) homes, earthbag homes (long bags filled with direct), and earthship homes made from recycled tires.

Tiny homes on foundations vs. wheels

One of the benefits of owning a tiny home is the ability to move your home from one place to another. However, not all tiny homes have wheels; some are affixed to a permanent foundation and resemble a traditional home.

Whether or not your home has wheels can actually affect your financing options. In most cases, a tiny home with wheels will not be approved for a traditional mortgage. This means you’ll need to find other means of financing your tiny home.

And even if your tiny home is built on a traditional poured foundation, you’ll still need to find a lender that offers loans on tiny homes.

How much do tiny homes cost?

One of the main attractions of tiny homes is their costs — typically costing under $100,000 — with some as low as $50,000 or less. Different tiny homes will come with varying costs and additional features and amenities can easily increase the cost of your tiny home.

Building a tiny house can be cost-effective, but if you plan on staying in one place you’ll need to purchase land to build it on. This can vastly increase the cost of your home, depending on where you choose to purchase land and build.

In addition, you may need to pay to have utilities run to your plot of land, which can cost tens of thousands of dollars, especially if you need to drill for a well. All of these additional costs can add up and make your tiny home less cost-effective overall.

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Financing options for tiny homes

If you want to finance your purchase of a tiny home, you’re most likely not going to be able to obtain a traditional mortgage. Most lenders have loan minimums and won’t approve a traditional home mortgage on a nonpermanent dwelling. Here are a few financing options for tiny homes to consider instead:

Personal loans

A personal loan is an unsecured loan that you can obtain through a bank, credit union or online lender. You usually need a good credit score and stable income to be approved for a personal loan. Loan terms can be up to 12 years in some cases, but interest rates will typically be higher than a home loan.

Personal loans don’t usually use your tiny home as collateral — so your lender can’t take the home if you have trouble paying. You’ll pay for this flexibility with shorter loan terms, higher rates and no tax benefits.

RV loan

RV loans are a type of secured loan made for recreational vehicles. If you plan on living in an RV or if your tiny home has wheels, you can qualify for an RV loan. Most RV loans are secured to your tiny home, meaning your lender can take the tiny home or RV if you default on your payments.

RV loans are only for qualified recreational vehicles approved by the Recreation Vehicle Industry Association (RVIA) and comply with U.S. Department of Transportation’s National Highway Traffic Safety Administration standards.

Builder financing

Some tiny home builders offer their own in-house financing, allowing you to get a loan directly from the company building your tiny house. These loans may be secured to your home (like a traditional mortgage), but the terms, rates and details of the loan will vary. It’s important to understand what type of financing your builder offers before choosing to finance through them.

Home equity loan

If you have an existing home with some equity built up, you can use a home equity loan to finance your tiny home build. Since home equity loans can be used for anything and are secured to your main home, you can typically get a low variable rate and lower loan payments than most other loan types. Just make sure you can afford the payments since defaulting on a home equity loan means your lender can seize your home.

Traditional Mortgage

While most lenders don’t offer tiny home traditional mortgages, some do. Paige Robinson, a real estate investor and the owner of House Buyers, said that getting a traditional mortgage on tiny homes depends on foundation and zoning. “Traditional mortgages require properties on permanent foundations,” she said. “Some jurisdictions allow tiny homes on permanent foundations, but it's essential to verify local regulations.”

Additionally, she said: “Tiny homes may not be permitted in all residential zones. Consult with local zoning authorities to ensure the property meets zoning requirements for mortgage eligibility.”

Pros and cons of tiny home

Owning a tiny home can be financially advantageous and allow you to downsize, but there are some challenges with buying and living in a tiny home as well. Here are a few pros and cons of tiny homes to consider:

Bottom line

Financing a tiny home will be more affordable than purchasing a traditional home, but you will not have the same number of mortgage lender financing options available. For many, to make your tiny home financially possible, you will need to rely on savings and a strong credit score to obtain a favorable personal loan or RV loan.