A tiny home can provide big benefits with a microscopic footprint. Although a tiny home is usually more affordable than more traditionally sized homes, you still need to find a way to pay for it. Here are a few methods to consider.
Why Tiny?
Officially, a tiny home is one that is smaller than 400 square feet, according to the International Residential Code. Compare that to the median size of a house built in 2023, which was 2,286 square feet, according to data from the U.S. Census Bureau. That’s almost six times the size of a tiny home.
Why would someone want to live in a tiny home? Isn’t more space better? Not always. People consider tiny homes for a number of reasons:
— They’re usually cheaper to buy and maintain.
— Smaller buildings are generally less expensive to heat and cool.
— They may have less environmental impact than larger homes.
— Tiny houses can help alleviate housing shortages by increasing home density where they’re allowed.
— Tiny homes on wheels may create flexibility for alternative living arrangements.
— Adding a tiny home to a property with an existing home can create an additional stream of income or allow families to enjoy multi-generational living.
Whether you’re attracted to a more minimalist lifestyle or you want to put your backyard to better use, tiny homes are an appealing solution.
[READ: Compare Current Mortgage Rates]
How Much Do Tiny Homes Cost?
Pricing out a tiny home depends on several factors, including the design, building materials, location, finishes (high-end or low-end), utility hookups, permits and labor. Building costs have increased substantially since the pandemic. But tiny houses are still more affordable overall than average-sized homes, with the average price of a tiny home running between $30,000 and $70,000, according to HomeGuide.
However, if you prefer to hire out the design, permitting, fabrication and installation, it could cost more.
“We recently looked at all of the ADUs [accessory dwelling units, which include tiny homes] that we built in California,” says Peter Winscott, vice president of growth at Villa Homes. “A very safe range is $300 to $400 per square foot.” Winscott notes that those prices are less than half the going rate for existing homes in nearby California markets like Marin County. Element Homes, a design-and-build firm based in California, also ballparks the cost of tiny homes at about $300 per square foot. Those prices include construction on permanent foundations.
Prefabricated tiny homes cost between $150 and $250 per square foot, on average. Custom builds can cost up to $450 per square foot. For a custom home that’s 500 square feet and $300 per square foot, you could pay $150,000 — foundation, construction and installation included. But if you live where building materials cost less and can do the labor yourself, you could cut your costs to between $30,000 and $70,000.
“My husband and I built a tiny house inside of a 10-foot by 20-foot shed,” says Rebecca Neubauer, a freelance writer and bookstore owner based in North Carolina. She estimates that building the house cost about $15,000 to $20,000, since she and her husband did the labor themselves, and they spent $75,000 for six acres of land to build on.
Financing Options for Tiny Homes
Even after you decide to go all in on living small, you’ll need to figure out how to finance a tiny house. There are a wide range of options, but which one you choose depends on your situation as well as the desired size of your house.
“The thing with financing a tiny home, in the broadest sense, is that it’s not a paved path, so there’s not a mortgage product specifically for tiny homes,” says Laura Lynch, a certified financial planner who specializes in advising the tiny home community.
“When it comes to financing, there are many different paths, depending on the type of vehicle or home that you’re considering, where it’s going to be placed, and potentially whether it’ll be placed anywhere versus on wheels,” Lynch says. “You often end up having to do savings, inheritance or a personal loan.”
Mortgages
Mortgages are the most common way to finance a new home, and you may be able to get a loan for a tiny house this way, too. The key is that the structure has to be permanent (meaning it’s attached to a foundation) to be financed with a mortgage. And, depending on the loan type, it usually needs to be at least 400 square feet (or at least 600 square feet for Fannie Mae loan programs).
For example, you may be able to qualify for a Freddie Mac CHOICEHome mortgage, which is designed for manufactured homes and allows down payments as low as 3%, “as long as your ADU or tiny home is built to the HUD code federal building standard,” says Winscott.
The FHA rehab mortgage allows you to add an ADU when you buy or refinance a property, but it must be attached to the original structure. Fannie Mae’s HomeStyle mortgage allows you to wrap the cost of adding a detached, permanent structure to an existing property when you buy or refinance.
FHA Title 1 Loan
The FHA Title 1 loan lets you purchase, refinance or improve a manufactured home. To qualify, the building must conform to Model Manufactured Home Installation Standards. You’ll also need to meet FHA borrower requirements, but there aren’t income or credit score minimums with this loan.
Personal Loan
Personal loans are good options for financing tiny homes, especially tiny homes on wheels, which are not classified as real estate. Personal loans can be secured or unsecured. Secured personal loans generally carry lower interest rates and are easier to get than unsecured personal loans. Unsecured personal loans have faster processing because there is no need to appraise the collateral.
You can find personal loans up to $100,000, which is sufficient for many types of tiny homes.
Home Equity Loan
You may be able to finance a tiny house by borrowing against property you already own. A home equity loan may offer the best combination of loan cost and a fixed interest rate. These mortgages usually come with fixed interest rates and terms as long as 30 years.
HELOC
A home equity line of credit, or HELOC, is another way to finance a tiny house using equity in your current home. Instead of a fixed interest rate and payment, the HELOC delivers a revolving line of credit that you can tap as needed. HELOCs offer flexibility, allowing you to pay for projects over time. They can also be good when you don’t know the final cost of your project. HELOC closing costs tend to run lower than those of home equity loans, and their starting rates are lower. However, their rates are usually variable, which can make budgeting for your payments a challenge.
Credit Card
If the tiny home is cheap enough and your credit limit is high enough, you can pay with a credit card. Keep in mind that the average credit card interest rate is over 23%, so finance charges could drive up costs if you don’t pay your balance right away.
RV Loan
RV loans have rates similar to those of personal loans. If your tiny home is on wheels, an RV loan might be the way to go. Depending on the lender and the vehicle’s price, you might be able to finance up to 100% of your cost, and loans exceeding $100,000 are not uncommon.
“Sometimes builders can build their tiny homes to qualify for RV loans,” Lynch said. “So if they’re built to RV standards, they can sometimes work with an RV lender.”
Dealer or Builder Financing
Some tiny home builders offer their own financing when you buy through them. For example, Villa Homes offers financing through its partner lenders, including two credit unions.
“We love the credit unions when it comes to financing, because they’re a lot more flexible in their underwriting criteria,” Winscott says.
Where to Find Tiny Home Financing
There are many different lenders that may be able to help you finance a tiny home.
Lightstream, for example, offers personal loans for tiny homes that start at 8.99% APR. Other lenders that offer personal loans in relatively high amounts include Best Egg, SoFi, Upgrade, and Upstart.
If you’d prefer to use your home equity to finance a tiny home, banks like PNC, Bank of America and Flagstar Bank offer home equity loans or lines of credit.
Whichever financing type you choose, be sure you compare interest rates, fees, and other terms among lenders to find the best deal for your situation.
“It’s a non-traditional lifestyle, and you’re going to come up against roadblocks,” Neubauer said of tiny-home living. “You just have to be persistent and creative.”
[CALCULATE: Use Our Free Personal Loan Calculator to Estimate Your Monthly Payments.]
Credit Score Needed to Finance a Tiny House
You may be able to qualify for a Fannie Mae or Freddie Mac mortgage with a credit score of 620, though most other lenders require a score of at least 660, Winscott says. For larger personal loan amounts, especially without collateral, you may need a score in the mid-700s. Lightstream, for example, requires a good to excellent FICO score for its loans.
Tiny House Loan Interest Rates
The interest rate you receive on a loan will vary according to your credit profile, loan amount, intended use and other factors. Below is an example of the interest rates you may see for various methods of financing a tiny house.
More from U.S. News
How to Get a Low Interest Rate on a Personal Loan
Do Personal Loans Help or Hurt Your Credit Score?
How to Get Tiny House Financing originally appeared on usnews.com
Update 10/30/24: This story was previously published at an earlier date and has been updated with new information.
