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Buying a tiny house can 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 can’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-size house is in all cash. Fortunately, would-be tiny homeowners still have financing options, including personal loans, 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, which can be $100,000. The average cost of a tiny home ranges from $30,000 to $150,000, 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 foundation. This can bar mobile homes from mortgage financing altogether. In some cases, mortgage lenders also have requirements on minimum square footage. Typically coming in at 400 square feet or less, 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 can 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 can often access up to 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 five to 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 can take what you need as you need it. You’ll 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 are 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 offered by banks, credit unions, online lenders, and even RV dealers. To qualify for an RV loan, your home needs to be certified as an RV by the Recreation Vehicle Industry Association (RVIA) and will need to 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 is not your primary residence. With RV loans, you generally need to make a downpayment. Rates tend to run higher than a traditional home loan, but repayment terms may be up to 20 years. Recommended: RV Upgrades: Everything You Need to Know
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 offer loans 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 onto financing with a builder, it’s a good idea to research options you can get on your own to make sure they are offering you the best 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 exploring. This option offers flexibility, since you and the lender can 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’ll 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 can 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 offered by banks, credit unions, and online lenders. Some online lenders actually specialize in offering personal loans 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 two to seven years. The rate you qualify for will depend on your credit. You typically need very good to excellent credit (at least 670 or higher) to get the best 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 can be a good option if you need the extra cash to close your tiny home purchase and can afford the monthly payments.Recommended: Personal Loan Tips That Can Help You Get Approved
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 will likely 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 offer flexibility when it comes to financing your tiny home project, since there are generally few restrictions on how the funds can be spent. You can use the money for materials, building costs, furniture, and even decor, which can 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 can 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 can 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 the best possible deal. Also, keep in mind that personal loans sometimes come with origination fees and other added costs. You’ll want to make sure you 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 and when comparing offers side by side.
Personal Loans Benefits
Personal Loans Risks
Won’t put your tiny home at risk
Higher interest rates than traditional home loans
Receive a lump sum of funds upfront
Short repayment periods can mean high monthly payments
Little to no restrictions on how you can spend the loan proceeds
Less flexible than mortgages
Special Considerations for Financing a Tiny Home
Before financing a tiny home, it's a good idea to have a solid estimate on how much the total project will cost. In addition to the cost of the house itself, you may have other expenses, such as:
The cost of leasing or buying land where the property will sit
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 homeowner’s insurance
Property taxes and permit fees
Propane tanks for a tankless water heater
To determine how much you may need to borrow, you’ll want to add up all your expenses, add a cushion for the unexpected, then subtract how much you can pay in cash.
Personal Loans With Lantern
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 offers from multiple lenders in order to choose the one that’s best for you. Check out personal loan rates today with Lantern and see if you prequalify.
Frequently Asked Questions
How can you finance a tiny home?
Are personal loans available for financing a tiny home?
What should you consider when financing a tiny home?
Photo credit: iStock/WINEXA
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About the Author
Kenny Zhu
Kenny Zhu is an active CFA charterholder and former banking and investments marketing manager, and former investment analyst with over a decade of experience in the financial industry. His work has been featured in a variety of publications including LendingTree, MagnifyMoney, Finance of America Mortgage, LLC, and ValuePenguin.
