All About Financing the Purchase of a Tiny Home

Buying a tiny house may be a great way to simplify your life. Figuring out how to finance that home, however, may not be so simple. Unlike buying a traditional home, you generally won’t get a 15- or 30-year mortgage on a tiny house. Home lenders typically have loan minimums (which often exceed the cost of a tiny home) as well as other requirements that many tiny homes don’t meet.

But that doesn't mean that the only way to pay for a pint-sized house is in all cash. Fortunately, would-be tiny homeowners still have financing options, including personal loans, recreational vehicle (RV) loans, home equity loans, and builder financing. Here’s a closer look at different ways you may be able to finance your tiny home.

Why Can’t You Get a Mortgage to Buy a Tiny Home?

Whether you’re looking to buy a mini cottage, she-shed, or container-style house, you may have a hard time finding a traditional mortgage. One reason is that mortgage lenders typically have minimum loan amounts, and many won’t issue mortgages below about $50,000. The average cost of a tiny home ranges from $30,000-$80,000, which means many tiny homes won’t meet minimum mortgage requirements. 

An additional challenge: Many mortgage lenders require that your property be built on a properly constructed and serviceable permanent foundation. This may bar mobile homes from mortgage financing altogether. In some cases, mortgage lenders also have requirements on minimum square footage, usually around 400 square feet. Typically coming in at around 225 square feet, tiny homes often don’t meet a mortgage lender’s home size requirements.

Tiny Home Financing Options

Even though a traditional mortgage might not be an option, there are still a few other routes you could take to finance your tiny home. Here are some you may want to consider.

A Home Equity Loan or HELOC

If you already own a home, and you’re not selling it in order to downsize, you may be able to get a home equity loan or home equity line of credit (HELOC) to finance your tiny house. With either, you’re often able to use up to 80%-85% of your home equity (your home’s value minus the amount of money you owe on your mortgage).

With a home equity loan, you receive a lump sum of cash that you repay over time. Home equity loans typically have fixed interest rates with repayment terms ranging from 5-30 years.

A HELOC, on the other hand, is similar to a credit card: You have a certain amount of money available to borrow and pay back, but you take what you need as you need it. You pay interest only on the amount you draw. HELOCs often begin with a lower interest rate than home equity loans, but the rate is variable, which means it rises or falls according to market rates.

The risk with either type of home equity loan is that they’re secured by your existing home. If you become unable to repay the loan, your home could be seized by the bank. 

RV Loan

If your tiny home is built on wheels, you may be able to get a recreational vehicle (RV) loan. These loans are available through banks, credit unions, online lenders, and even RV dealers. 

To qualify for an RV loan, your home often needs to be certified as an RV by the Recreation Vehicle Industry Association (RVIA), and it must comply with standards set by the U.S. Department of Transportation’s National Highway Traffic Safety Administration. Some lenders may also require that your tiny home not be your primary residence. 

With RV loans, you generally need to make a down payment. Rates tend to run higher than a traditional home loan, but repayment terms may be up to 20 years. 

Builder Financing

Tiny home builders and contractors are familiar with the difficulty that comes with financing a tiny home. As a result, some companies that build tiny homes have loan options for them as well. Often, they do this by partnering with an outside lender. 

Keep in mind, however, that builder financing typically involves getting one of the loans listed here (such as an RV or personal loan). Before you sign on to financing with a builder, it’s a good idea to research options you’re able to get on your own to make sure they’re offering you a competitive rate.

Family Loans

If you’re looking for custom terms and have a good relationship with a deep-pocketed family member, a family loan might be worth considering. This option offers flexibility since you and the lender are able to set the terms of the loan in any way you choose. 

Though family loans are less formal than loans from a professional lender, it’s wise to get everything in writing rather than rely on a handshake deal. You may want to draw up a promissory note that includes all the details of the loan, including the loan amount, interest, payment amounts, payment due dates, and the term (length) of the loan. 

Keep in mind that this option carries its own risks, as failure or delayed repayments may damage relationships, sometimes irreparably.

Personal Loans

Getting a personal loan is one of the most common ways to finance a tiny home purchase. These loans are available through banks, credit unions, and online lenders. Some online lenders actually specialize in personal loan options for financing tiny homes up to $100,000.^, 

Personal loans are often unsecured (meaning there’s no collateral required) and provide a lump sum of money that you pay back (plus interest) in monthly installments, typically over one to seven years. The rate you qualify for depends on your credit. You typically need very good to excellent credit (at least 670 or higher) to get competitive rates. If your credit is less than stellar, you may be able to get a secured personal loan, which requires putting up an asset as collateral. 

Personal loans may be a good option if you need the extra cash to close your tiny home purchase and are able to afford the monthly payments.

Benefits of Using Personal Loans for Tiny Home Financing

Unsecured personal loans require no collateral for borrowers, which means that you won’t risk losing your tiny home in the event you’re unable to make your payments (though your credit is likely to take a hit). 

In addition, personal loans generally disburse funds quickly and in one lump sum. This allows you to buy the entire property (or required materials, if you’re building a tiny home from scratch) up front and in full.

Personal loans also provide flexibility when it comes to financing your tiny home project since there are generally few restrictions on how the funds are spent. You may use the money for materials, building costs, furniture, and even decor, which could go a long way if you have any money left over after your tiny home purchase.

Recommended: Personal Loans for Home Improvement

Risks of Using Personal Loans for Tiny Home Financing

Personal loans typically have much shorter repayment periods than traditional home loans, which could result in relatively high monthly payments. And while mortgage lenders often allow for grace periods and mortgage forbearance, this typically isn’t the case with personal loan lenders. 

Rates for personal loans also vary widely and easily go up into the double digits for borrowers with below-average credit. It generally pays to shop around and compare rates for personal loans to make sure you’re getting a competitive deal. 

Also, keep in mind that personal loans sometimes come with origination fees and other added costs. You may want to look at the loan’s annual percentage rate (APR), which includes interest plus fees, to make sure you understand the full cost of the loan when comparing options side by side.

Special Considerations for Financing a Tiny Home 

Before financing a tiny home, it's a good idea to have a solid estimate of how much the total project costs. In addition to the cost of the house itself, you may have other expenses, such as: 

• The cost of leasing or buying the land for the property site

• Transportation and setup costs if you buy the home from a factory

• Fees for connecting to local utilities

• Specialized compact and efficient appliances

• Storage fees for items that don't fit in your tiny home

• Parking fees at campgrounds and fuel if you take your tiny home on the road

• RV insurance, construction insurance, or homeowners insurance

• Property taxes and permit fees

• Propane tanks for a tankless water heater

To determine how much you may need to borrow, you may want to add up all your expenses, add a cushion for the unexpected, then subtract how much you’re able to pay in cash.

The Takeaway

Financing a tiny home can be tricky since traditional mortgages often won't work. However, you have several options. including personal loans, RV loans, or home equity loans. Personal loans are a popular choice because they’re typically unsecured, flexible, and offer quick lump-sum funding. Just remember to shop around for the best rate and make sure your monthly payments fit comfortably in your budget. Before you borrow, calculate all costs, including the home, land, and setup fees, to know exactly how much you need.

If you decide that a personal loan is the right financing option for your tiny home, comparing personal loan interest rates is easy and convenient with Lantern by SoFi. All you have to do is fill out one simple form, and you can explore options from multiple lenders in order to choose the one that’s best for you. 

Check out personal loan rates today with Lantern.