Tiny houses. So hot right now. According to a 2020 survey, 56% of Americans said they would live in a tiny home, and 86% of first-time homebuyers would consider purchasing one as their starter home. And with the tiny house market expected to grow by 5.8 billion through 2024, at a 7% CAGR (compound annual growth rate), this home trend is propelling full-steam ahead.
Why? The main driving motivators are the low price of a tiny house compared to traditional homes, environmental efficiency and low carbon footprint, and downsizing opportunities — especially in the wake of the coronavirus pandemic in 2020.
“I think a lot of people are minimalists, and with COVID-19, a lot of people have redesigned how they want to live. People want to get out of apartments and get into their own place where there’s some green space,” says Maura Allard, a top real estate agent and tiny house owner in Salem, Massachusetts.
Plus, they’re super-cute and often have really cool designs. Sounds great, right?
At first glance, a tiny house seems like such a charming, simple alternative to owning a big, expensive home, but the financial barrier can be trickier to bust through than you think. While tiny houses are significantly more affordable than standard-sized homes, they still require a substantial investment. And you can’t always get a traditional mortgage for a non-traditional tiny house.
For the tiny-curious, here are the key tiny house stats:
- The typical size of a tiny house is between 100 and 400 square feet.
- Tiny houses are available to rent or own.
- Tiny houses can be on wheels (mobile) or set on a foundation.
- A tiny house can be built or parked on land with other properties or its own lot.
- An owner can design and build a tiny house, purchase a prefab tiny house from a manufacturer, or buy a tiny house kit to build from provided plans and materials.
According to HomeAdvisor, the average cost of a tiny house is $45,000, with that price increasing or decreasing depending on a range of factors. To build a tiny house on a permanent foundation costs about $52,000, on average, with an estimated added cost of $5,000 to $8,000 for the foundation itself. For this option, you will also need to consider the cost of renting or buying the land the house sits on.
The average price of a mid-range, all-inclusive prefab tiny house is about $60,000 and ranges to $150,000 or higher for a high-end, luxury model. The price of DIY tiny-house kits ranges from around $7,000 and $22,000, from the smallest square feet to the largest.
The issue with tiny houses is that mortgages are a lot harder to get, and we don’t all have tens of thousands of dollars stashed away for a rainy day. If your tiny house doesn’t have a foundation, isn’t on land that you own, and the loan amount isn’t at least $50,000, securing a mortgage is very unlikely.
It seems that the odds are against homebuyers looking to finance their tiny house, but don’t give up your tiny-life dreams just yet. We’ve gathered all the info on how to sidestep tiny house mortgage obstacles to give you alternative loan and financing options.
How to buy a tiny house: Payment plan options
Financing option #1: Mortgage loan
Unless you have enough money saved up to pay for your tiny house in cash, getting a mortgage loan is the ideal way to pay.
To get a mortgage for a home — tiny or otherwise — most lenders require the loan to be for at least $50,000, the buyer to own the land where the property is located, and the house to be built on a foundation.
The home must be the primary residence, not an accessory dwelling unit (ADU) like a guest house, carriage house, or “granny pod.”
Typically, to get a mortgage, a buyer needs a credit score of at least 620 (though FHA loans can go lower), a minimum down payment amount that varies depending on the type of loan, and enough money saved for closing costs and a few months’ worth of monthly payments to show the bank.
A mortgage loan is the best type of loan to have, because it comes with the lowest interest rate, especially when interest rates are low. According to Freddie Mac, the average 30-year fixed mortgage rate hit a new record low of 2.65% in January 2021 after a steady decline throughout 2020. Fannie Mae expects these rates to stay around 2.8% through the end of 2021, and the Mortgage Bankers Association projects a mild uptick to 3.3%.
In addition to the interest and loan principal — or the amount you borrowed from the bank — are your property taxes and homeowners’ insurance.
Of the loan terms available, 15- and 30-year fixed-rate mortgage terms tend to be the most common. A shorter loan term comes with a higher monthly payment but a lower interest rate, and a longer-term will have a lower monthly payment but higher interest rate.
One mortgage strategy worth considering is to go to a smaller, local bank instead of going through a large national lender. These smaller, independent banks may be able to accommodate the unique needs of tiny house buyers more than a large mortgage company would.
“Sometimes a loan that’s held by a bank where they don’t resell it on the loan market would be a good way to go. You could go to a local bank that you have an established relationship with,” says Allard.
Financing option #2: Tiny house builder’s loan
Some tiny-home builders will offer in-house financing options, like Portland, Oregon-based Tiny Heirloom. Many others will partner with lenders to offer loans, like Cheeky Monkey, which works with Liberty Bank.
The cost of the land is not included in a builder loan, so you’ll need to secure that first before moving forward. This first step itself can be challenging because of zoning restrictions. Certain ordinances that can hinder putting a tiny house on a piece of land include minimum square feet, plumbing, and permanent foundation requirements. So, keep in mind that you will need to buy land, get a land loan, or rent land when planning and budgeting for your tiny home, and you may want to also budget for a foundation.
Common tiny house builder loans have 15-to-20 year terms with interest rates between 6% and 10%. Loan conditions will vary depending on the partner lender, but could include a down payment, an appraisal (if you’re getting a secured loan, in which the property itself secures the loan), and a minimum credit score.
Financing option #3: Personal loan
Just because you can’t get a conventional mortgage loan to finance a tiny house doesn’t mean you can’t get a different type of loan yourself. The price of most tiny homes falls into personal loan parameters, opening up more options.
Credit unions and online lenders offer personal loans. Some major credit unions include Navy Federal and Alliant. Lending Club and LightStream, the latter a division of SunTrust bank, are other examples of personal loan providers.
In general, most personal loans are available in smaller amounts and for shorter terms compared to business and mortgage loans. These loans typically cap out at $50,000, with a maximum five-year payment term. Interest rates start around 7.49% for three-year terms and can go up to 18% for longer periods.
Requirements for personal loans include having a good credit report and proof of sufficient, steady income to meet monthly payments. Additionally, eligibility for credit union membership can include working or residing in the location of a particular credit union and paying a small fee to join.
Financing option #4: RV loan
There is one distinct feature and advantage of tiny homes when it comes to financing: Many of them are on wheels, making them strong candidates for an RV loan. Approval for an RV loan is contingent upon RV Industry Association certification and living in the tiny house full-time.
Because RVs are mobile and not intended for a permanent setup, there are no property taxes associated with RV loans because land is irrelevant. If you can find a tiny house certified by the RVIA, it’s an attractive option because RV loans have lower interest rates and you can opt for longer loan terms.
Depending on the RV loan lender, interest rates start as low as 3.99% and go up to 12.39%, with the majority in the 5% to 6% range, and payment terms for up to 20 years. To qualify for the best RV loan rates, you’ll need a credit score of 700 or higher, though there are options for borrowers with lower credit scores if your score is at least 550.
Financing option #5: Existing home equity
If you’re looking to expand your property collection, home equity could be a beneficial option to fund your second (tiny) home. This way, you don’t have to tap into savings or retirement funds, and if you have enough equity to cover a tiny house purchase, a home equity loan or home equity line of credit (HELOC) could be a great way to access it.
Home equity loans and HELOCs can come with lower interest rates and fees than other forms of credit, and are often easier to facilitate than a personal loan, which is a solid bonus — but that’s because they’re secured by your primary property. That means that if you fail to make these loan payments, your original house could be in jeopardy.
According to the Mortgage Bankers Association (MBA), because of economic challenges caused by COVID-19, HELOCS dropped by 2.9% in 2020, but the MBA projects an increase by 10.8% in 2021. They also anticipate home equity loans to increase by 9% in 2021.
Furthermore, the National Real Estate Association reported that the average homeowner’s equity gain year-over-year in 2020 was $17,000 due to property appreciation rates reaching their highest point since 2014. If your current home is gaining equity quickly, you may be able to tap into it to buy a tiny house.
Financing option #6: Peer-to-peer lending or crowdfunding
When a tiny house purchase is too small for a mortgage loan but too big for your current savings and debt situation, crowdfunding or asking family and friends for help could be the solution.
Tiny-life advocacy networks like Tiny House Loans connect hopeful homebuyers with those who want to invest in the tiny house community.
When exploring this route, other crowdfunding platforms, like GoFundMe, offer a way to get personal projects funded. If you plan to use your prospective tiny house for any kind of business operation, Kickstarter and Indiegogo are additional options.
If your family and friends have the means to chip in, that’s another appealing possibility. If you approach the proposition as a wedding gift, trade for goods or services, or with the offer to stay in the tiny house on occasion, that could sweeten the deal. Or maybe your friendly financiers would help out of the sheer kindness of their hearts.
Financing option #7: Charge to credit card
While paying for a tiny house using a credit card is not at all a recommended method, it is one that’s technically available to you.
If you have a large enough balance, you could choose to use a credit card for all or part of your payment. Before moving forward with this strategy, be aware that interest rates are highest with credit cards out of all these options, and you should be prepared to pay off the expense ASAP.
Financing option #8: Pay in cash
Last but absolutely not least: paying in cash is the ideal, clean-cut way to buy a tiny house. Whether you already have a healthy reserve of funds saved for a tiny house purchase or you’re in the earlier stages, knowing your initial and ongoing payments is the first step to reach your goal.
The cost to build a tiny house can range from approximately $33,000 to do it yourself to $61,000 to have it professionally built (complete with upgrades); you could spend $3,750 to outfit a used tiny home or up to $102,000 for a professional design and build, to name a few examples.
Additional costs can include buying or renting the land, septic tank installation or sewer hookup, electricity hookup, and monthly utilities, which are significantly cheaper for tiny homes. (Some good news!)
Need some budgeting help? If you’re serious about making your tiny house dreams come true, find out how to save for a 20% down payment on a regular house — close to what an entire tiny house costs — within the next three years, or even in just one year.
While tiny houses come with their quirks — both aesthetically and logistically — there are plenty of creative solutions to seal the deal. Decide the best path forward to making the big purchase for starting your tiny life.
Header Image Source: (Yoav Hornung / Unsplash)