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How to finance a tiny home

Yahoo Personal Finance· Getty Images
8 min read

Not everyone dreams of living in a three-story mansion in the hills of Malibu. For some, a cozy tiny home 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 in a tiny footprint. Here’s everything you need to know about how to finance a tiny home purchase and whether it’s the right move for you.

Learn more: Housing types 101 — What is a duplex?

Tiny home financing refers to any method of borrowing money to help pay for your tiny home, which will likely set you back anywhere from $20,000 to $50,000. For context, the median home price in the United States was $417,700 as of Q4 2023.

Though tiny houses cost only a fraction of traditional single-family homes, paying the entire amount out of pocket can still strain your budget. By financing a tiny home, you’ll have more room in your short-term budget to cover up-front expenses like loan origination fees, furniture, and moving expenses.

Learn more: Can you buy an apartment?

In most cases, when you need financing to buy a house, you get a mortgage. However, mortgages aren’t usually available for tiny homes because these houses cost less than mortgage lenders’ minimums for home loans. Here are a few other types of loans to consider for your tiny home purchase.

Personal loans are unsecured loans that don’t require collateral or security. However, because they’re riskier for the lender, they typically have higher interest rates and shorter repayment terms than traditional mortgages.

If your tiny home is on wheels and built as a vehicle in compliance with National Highway Traffic Safety Administration (NHTSA) regulations, it might qualify as an RV. To get an RV loan, your tiny home must be certified by the Recreational Vehicle Industry Association (RVIA). Depending on your credit score, loan amount, and loan term, RV loan rates can be comparable to traditional mortgage rates or significantly higher.

If the tiny home is not your first property, you could use the equity you’ve acquired in your other home(s) to finance the purchase. You could do so via a home equity loan or home equity line of credit (HELOC). The main difference between the two is that the former gives you a lump sum up-front, whereas the latter works more like a credit card — you tap into the line of credit as needed and only pay interest on the amount you borrow. If you’ve accumulated at least 20% equity in a property, you may qualify for a home equity loan or line of credit.

Dig deeper: Home equity loan vs. home equity line of credit (HELOC)

If you’re building a tiny home with a tiny-home builder or contractor, they may be able to help you secure financing. Sometimes, they work with lenders to help buyers secure loans through their business.

Learn more: Is it better to build or buy a house?

While swiping your credit card is another option to finance your tiny home, it should be your last resort since interest charges can quickly pile up and damage your financial health — especially with average credit card interest rates sitting at 21.59% as of February 2024. Also, for this financing method to work, you’d need a credit limit that’s high enough to cover the cost of your tiny home.

The exact steps to financing a tiny home depend on what 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 on how to finance a tiny home.

Lenders review your credit score to assess your risk as a borrower, so knowing where you stand regarding your credit health can be helpful. Federal law allows you to request a free weekly copy of your credit report from each of the three major credit bureaus at annualcreditreport.com.

If your credit health is less than ideal, taking steps to improve your credit score — such as paying bills on time and disputing errors on your credit report — before applying for a loan could help you secure better interest rates.

Don’t rush the process — thoroughly explore your options for tiny home financing to make the most informed decision. For example, while credit cards or contractor financing may be convenient, they usually are not the most affordable. So if your FICO score looks good, consider low-rate personal loans, RV loans, home equity loans, or HELOCs from reputable lenders.

Read more: What is a multifamily home?

Most lenders allow you to check your customized rates through online prequalification. Apply for prequalification with a few lenders to compare their terms. This process only takes a few minutes and won’t impact your credit score since it typically involves a soft credit pull. But remember that just because you prequalify for a loan doesn't mean you’ll automatically be approved when you submit your official application.

Once you’ve received 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 finding 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 complete an application in person. Once that’s done, the lender will run a hard credit inquiry to check your credit, which could temporarily decrease your score by a few points.

Once your application is approved, lenders typically deposit the funds into your bank account. You could then use this money to purchase a tiny home. Make sure to review the loan agreement to know when your payments are due. Consider setting up automatic payments, so you don’t miss any bills and damage your credit.

Learn more: Buying a house versus a condo

Tiny home living is not for everyone. Before applying for a loan or line of credit, consider these pros and cons of purchasing a tiny house to help you make the most informed decision.

  • Reduces your carbon footprint. Because tiny homes require fewer supplies to build and less energy to power, they’re rather eco-friendly compared to bigger houses. So, if you’re environmentally conscious and want to reduce your carbon footprint, investing in a tiny home is an excellent way to start.

  • Affordability. Tiny homes typically cost between $20,000 and $50,000, making them much more affordable than traditional single-family homes. If you’re on a tight budget, tiny homes not only offer a cost-effective and low-maintenance living option but can also be an excellent entry point to homeownership.

  • It can be portable. If you build your tiny home on wheels instead of on a slab, you’ll have the flexibility and freedom to move it wherever you want.

Read more: What is a modular home?

  • Limited space. While downsizing can be freeing, living in a tiny home may not offer the most comfortable lifestyle, especially if you have a big family. If you value your personal space, consider other types of homes.

  • It might not meet local codes or laws. Not all local building codes allow you to live in a tiny home. Before purchasing or building one, speak to local officials about your plans to ensure you won’t face any issues.

  • It could depreciate in value. If your tiny home sits on wheels and is considered an RV, it could depreciate in value just like a car. So, unlike traditional homes that tend to gain resale value over time, tiny houses may depreciate.

Learn more: Modular versus manufactured homes

If you're ready to embrace the tiny house lifestyle, the next step is determining whether you want to purchase a tiny home in cash or through financing options like RV and personal loans. Depending on your financial situation, one may make more financial sense than the other. If you have concerns about financing a tiny home, talk to a certified financial adviser specializing in real estate investments or a home loan expert to guide you in the right direction.

Read more: What is a manufactured house, and how do you finance one?

Yes, living in a tiny house could save you money since less space generally means less money spent on utility bills and maintenance costs. The house itself also costs much less than traditional single-family homes and most other property types.

If you built your tiny house on wheels, yes, it’s possible to travel around with it. However, because tiny homes are not built in the same way as travel trailers, they could suffer damage if they’re constantly exposed to the movement and friction of road travel.

Most likely not, since most mortgages require that the house be built on a foundation and meet a specific square footage threshold. For example, FHA loans don't cover most tiny houses because the FHA requires a 400-square-foot minimum, which is larger than many tiny houses.

This article was edited by Laura Grace Tarpley