Not everyone dreams of living in a three-story mansion in the hills of Malibu. For some, a cozy little house is more than perfect. Tiny homes are exactly what they sound like: small and often portable houses that allow you to maximize your living space on a small footprint. Here’s everything you need to know about how to finance the purchase of a small home and whether it’s the right move for you.
More information: What is a tiny house and how much does it cost?
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Tiny home financing refers to any method of borrowing money to help pay for your tiny home, which will likely cost you anywhere from $30,000 to over $50,000 (although it depends on where you live). For context, the average home price in the United States is currently well over $400,000.
Although tiny homes cost a fraction of traditional single-family homes, paying the full amount out of pocket can still put a strain on your budget. Borrowing money to finance a tiny home gives you more room in your short-term budget to cover upfront costs, such as loan origination fees, furnishings, and moving expenses.
More information: 12 housing types for tenants and buyers
When you need financing to buy a house, in most cases you will get a mortgage. However, mortgages are not usually available for small homes because these homes cost less than mortgage lenders’ minimum amounts for home loans. Here are a few other types of loans you can consider for your tiny home purchase.
Personal loans are unsecured loans that do not require collateral or security. Because they are riskier for the lender, they typically have higher interest rates and shorter repayment terms than traditional mortgages.
If your tiny house is on wheels and built as a vehicle in accordance with National Highway Traffic Safety Administration (NHTSA) regulations, it may qualify as an RV. To get an RV loan, your tiny house must be certified by the Recreational Vehicle Industry Association (RVIA). Depending on your credit score, the amount borrowed, and the term of the loan, RV loan interest rates can be comparable to traditional mortgage rates or significantly higher.
If the small home is not your first home, you can use the equity you have acquired in your other home(s) to finance the purchase. You can do this through a mortgage loan or a home equity line of credit (HELOC).
The main difference between the two is that a home equity loan gives you a fixed amount of money upfront, while a HELOC works more like a credit card: you tap the line of credit as needed and only pay interest on the amount you borrow. If you have built up at least 20% equity in a home, you may qualify for one of these types of second mortgages.
Dig deeper: Home equity loan vs. home equity line of credit (HELOC)
If you’re building with a small home builder or contractor, they may be able to help you secure financing. Sometimes they work with lenders to help buyers obtain loans through their company.
More information: Is it better to build or buy a house?
While using a credit card is technically another option to pay for your tiny home, it should be your last resort. Credit cards charge high interest rates, and the interest charges can quickly pile up and damage your financial health, especially with the average credit card interest rate at 21.76% as of August 2024. For this financing method to work, you also have a high enough credit limit to cover the cost of your tiny home.
The exact steps for financing a tiny home depend on the type of loan you get, but we can give you an idea of how the process will typically go. Here’s a step-by-step guide to financing a tiny house.
Lenders assess your credit score to assess your risk as a borrower, so it can be helpful to know where you stand on your credit status. Under federal law, you can request a free weekly copy of your credit report from each of the three major credit bureaus (Equifax, Experian and TransUnion) at Annualcreditreport.com.
If your credit score is in rough shape, you can take steps to improve your score (such as paying bills on time and disputing errors on your credit report) before applying for a loan so you can get better interest rates.
More information: What Credit Score Do I Need to Buy a House?
Don’t rush the process: thoroughly research your tiny home financing options to make the most informed decision. For example, while credit cards or contractor financing can be convenient, they are usually not the most affordable. So if your FICO score looks good, consider low-interest personal loans, RV loans, home loans, or HELOCs from reputable lenders.
Dig deeper: How do you get a HELOC?
Most lenders allow you to check your adjusted rates through online prequalification. Apply for pre-qualification from a few lenders to compare their terms. This process only takes a few minutes and will not affect your credit score as it is typically a soft credit pull. But remember: Just because you pre-qualify for a loan doesn’t mean you’ll automatically be approved when you submit your official application.
After you receive your prequalification letters from at least three different lenders, use a loan calculator to estimate how much your monthly payments and long-term interest costs will be.
After you find an offer that makes the most financial sense for your situation, submit a formal application. Most lenders allow you to do this online, but some may require you to apply in person. Once that’s done, the lender will run a hard credit inquiry to check your credit, temporarily lowering your score by a few points.
Lenders usually deposit the money into your bank account once they have approved your application. With this money you can now buy a tiny house. Check the loan agreement to find out when your payments are due. Consider setting up automatic payments so you don’t miss bills and damage your credit.
Living in a small house is not for everyone. Before you apply for a loan or credit, consider these pros and cons of buying a small home so you can make the most informed decision.
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Reduces your ecological footprint. Because small homes require fewer supplies to build and less energy to power, they are relatively environmentally friendly compared to larger homes. So if you’re environmentally conscious and want to reduce your carbon footprint, a tiny house could be a good fit for you.
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Affordability. Tiny homes typically cost between $30,000 and just over $50,000, making them much more affordable than traditional single-family homes. If you’re on a budget, tiny homes offer a cost-effective and low-maintenance living option and can also be an excellent starting point for homeownership.
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It can be portable. If you build your tiny house on wheels instead of a floor, you have the flexibility and freedom to move it wherever you want.
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Limited space. While downsizing can be liberating, living in a small house may not provide the most comfortable lifestyle, especially if you have a large family. If you value your personal space, consider other types of housing.
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It may not comply with local codes or laws. Not all local building codes allow you to live in a tiny house. Before purchasing or building one, talk to local officials about your plans to ensure you don’t run into any problems.
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It could drop in value. If your tiny house is on wheels and is considered an RV, it can depreciate in value just like a car. So small homes are more likely to lose value than traditional homes, which tend to increase in value over time.
Read more: What is a single-family home and should you buy one?
If you’re ready to embrace the tiny home lifestyle, the next step is to determine whether you want to purchase a tiny home with cash or through financing options like RVs and personal loans. Depending on your financial situation, one may make more sense than the other. If you’re concerned about getting a small home loan, contact a certified financial advisor who specializes in real estate investments or a home lending expert to guide you in the right direction.
Yes, living in a small house can save you money, because less space generally means you spend less money on utility bills and maintenance costs. The home itself also costs much less than traditional single-family homes and most other home types.
If you built your tiny house on wheels, then yes, it is possible to travel around with it. However, because small houses are not built in the same way as caravans, they can suffer damage if they are constantly exposed to the movement and friction of road travel.
Most likely not, as most mortgages require the home to be built on a foundation and meet a specific square footage threshold. For example, FHA loans don’t cover most tiny homes because the FHA requires a minimum of 400 square feet, which is larger than many tiny homes.
It’s not necessarily difficult to finance a tiny house if your finances are in order. You should be able to hit rock bottom if you have a good credit score, a steady income, and a low debt-to-income ratio (DTI). However, you usually can’t buy a small house with a traditional mortgage. Instead, you’ll need a personal loan, an RV loan, or another type of home loan.
This article was edited by Laura Grace Tarpley.
