Last Updated: Jan 6, 2021
When most people think of the challenges of living in a tiny home, space-related concerns are the first thing that comes to mind. Where are we going to house our guests when friends want to visit? What are we going to do with that huge antique dresser willed to us by grandmother? As modern-day homes continue to increase in square footage while the overall family size is falling, we have come to expect homes to have superfluous space that is seldom used. However, Tiny homes are teaching people the values of simplicity, frugality, and doing more with less. Many tiny homeowners discover more freedom in a home that requires less stuff to fill and fewer long days at the office to pay off.
One of the most frustrating though seldom-anticipated challenges associated with building a tiny home is financing the home's cost. Banks and other traditional mortgage lenders often have minimum mortgage amounts that are well above the costs of many tiny homes on the market. Though it can certainly be possible to pay outright for a tiny home without any financing, many people interested in building or purchasing a tiny home are discouraged due to the lack of home loan options.
Like all houses, tiny homes come in a wide range of styles and prices. If you are planning to self-build part or all of your tiny home, you might be able to keep your costs well under $10,000 and thus avoid the need to visit the bank. Over two-thirds of all tiny homes are built without any mortgage or home loan. However, high-end luxury tiny homes that are commercially built can have a price per square foot that is more than double the price for traditional homes.
While the median list price for new and used homes in the USA is around $140 per square foot, some of the more deluxe tiny homes can cost upwards of $750 per square foot, like this 200 square foot tiny home retailing or $150,000. The average price of a DIY tiny home is $23,000. While this is significantly less than a traditional home, not everyone has the financial ability to be able to pay that amount outright.
If you are planning on purchasing a tiny home, several manufacturers offer different packages ranging from unfinished “shells” with finished exteriors but basically empty interiors to completely finished homes, and this will obviously affect the end price. You can find a complete list of tiny home construction companies here, and many of them offer free quotes.
Banks and other mortgage lenders are often reluctant to change their home loan lending practices. The $300,000, a 30-year mortgage, has become a staple of the modern American family's economy, and banks have structured their lending portfolios around those instruments. One of the main reasons banks will often deny financing for tiny homes is their size and cost. From the lender's perspective, they have to go through the same procedures to review, process, approve, and follow through on all loans, no matter if they are for $25,000 or $250,000.
Banks will often disqualify tiny homes from traditional mortgages because of their mobility. Many tiny homes are built on wheels, and banks might consider a portable house, not a real home, but rather a recreational vehicle (RV).
The national average for a home loan is close to $225,000, while the average minimum amount approved by banks is $50,000. Banks obviously make more money by lending out larger sums of money. Their strict minimum mortgage amounts will often automatically disqualify several tiny home builders from applying for a mortgage.
Fortunately, banks are not the only way to finance a tiny home. Below, we offer three alternative and unconventional ways to financing your dream tiny home.
If you already have a home and are interested in building a tiny home as a vacation home or a secondary home, the easiest way to find financing is through taking out a home equity loan. With this type of financing, the homeowners use the equity they have built upon their primary residence as collateral for a new home. The good part about home equity loans is that the bank will rarely question how you plan to use the loan money. While many people take out home equity loans to improve or renovate their existing homes, using that money to build or purchase a second tiny home is also feasible.
Since many tiny homes are built on wheels to help the owners move the home from one spot to the next, it might be easier to apply for an RV loan instead of a traditional mortgage or home loan. RV loans are specifically tailored to recreational vehicles. The institutions financing these types of instruments might ask to see certification that the tiny Home meets the manufacturing and safety requirements of the Recreational Vehicle Industry Association. While RV loans typically have a slightly higher interest rate than mortgages, you should still be able to find a loan for under 8% APR with negotiable term lengths.
An unsecured personal loan is another option for financing your tiny home. These lending instruments usually have interest rates above 10% due to the lender's increased amount of risk. However, if you are planning on placing your tiny home on a foundation (and not on wheels), this may be your best option. While many larger banks have strict requirements for unsecured personal loans, there are several online peer-to-peer (P2P) lending platforms. Prosper and Lending Club are two of the most popular P2P platforms that might help you to be able to get a personal loan to buy or build your tiny home. Since several different individual lenders will view your loan application, you can often find financing options with lower interest rates than what banks offer.
You could consider seller financing as a way to pay for your tiny home. You can find owner financed tiny homes for sale on eBay and Trovit. There is even a website specifically dedicated to used tiny homes for sale where you can find many owner financing offers.
Tobias runs an agroecology farm and a natural building collective in the mountains of El Salvador. He specializes in earthen construction methods and uses permaculture design methods to integrate structures into the sustainability of the landscape.