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The Ultimate Guide to Financing a Tiny Home

The Ultimate Guide to Financing a Tiny Home

If you’re considering getting financing for a tiny home, you have plenty of options to choose from. You can pay for it with your savings if you have any, or you can get a personal loan, home equity loan, or recreational vehicle loan. 

Tiny homes are considered the most affordable and are preferred mostly by millennials. There’s a continued rise in demand for this type of dwelling, so many would like to learn about their options to secure financing for a tiny house. 

This post is a complete guide to financing a tiny home. Keep reading to find out if it's better to build it yourself or buy a tiny house, what general requirements you should meet to be eligible for a loan, and what financing options are there for tiny homes. 

You’ll also learn about the financial risks a tiny home poses and whether bad credit will jeopardize your chances of getting financing for your tiny house. 

What is a tiny house?

There can be many ways to interpret a tiny home because it means different things to different people. 

Primarily, a tiny home means a small-scale, fully-fledged living unit. This could be a home on wheels, also called a recreational vehicle, or a house built on a permanent foundation.

Building or buying and living in a tiny home involves consciously choosing a life of simplicity. The focus will be on fewer material possessions and a smaller, eco-friendly footprint. 

Ideally, a tiny home is about finding clever ways to utilize space and innovative technologies to design and construct the house.

A tiny home, usually up to 50m², is a self-sufficient, high-quality dwelling inhabited full time. The house can be mobile or entirely off-grid. 

The demand for tiny homes is on the rise, with the market size expected to grow by $5.80 billion between 2020-2024.

Living in a tiny house could imply financial freedom. In other words, you’re free from mortgage or high house rent. 

Do it yourself or buy a tiny house?

Building a tiny house is typically cheaper than buying a pre-built unit. But regardless of what you decide, there are several things to consider like construction type, amenities, financing, and the location of the land the house will be sitting on.

If you were to build or buy a tiny house, you must consider the upfront costs. The cost of a tiny home ranges between $10,000 and $100,000. It can be more than that based on materials, accessories, footprint, and amenities. 

By building your tiny house, it would be easier to keep your costs lower compared to if you were to buy one since you’ll have more control over the spendings. 

By buying a house plan and building a tiny house yourself, you might significantly reduce the upfront costs. There are firms selling customizable house plans. 

However, you need not focus so much on the savings of building the house yourself. There’s a likelihood to underestimate the implication of making it yourself, as one small mistake could cost you a lot of money to fix.

So, before you build your tiny house, here are the factors to consider as they’ll affect your total cost:

  • Location
  • If you’re to purchase land
  • The size of the house
  • If you’re building on a foundation or on wheels
  • What building materials you’ll be using
  • The costs of building permits in your area
  • Availability of utilities
  • What amenities to include

Materials alone are likely to cost you between $20,000 to $60,000.It could even go beyond this, depending on the materials you’ll use. Building permits could cost about $1,350 on average, though this could go higher if you were to go for a larger floor plan or if your materials were more customized.

For a tiny home on wheels, the foundation is likely to cost you about $4-$7 per square foot. 

But if building a tiny house isn’t for you, there are pre-built homes that you can buy. There are tiny home providers across the country that offer pre-fabricated units. These providers will also offer you free shipping.

Though looking for and buying a pre-built house is easier and saves you time, there are several factors to consider, or you might end up paying a higher price than if you were to build one. 

A pre-built house can cost you about $75,000 or more based on the kind of luxury included. 

There are cheaper options if you find the price too high. You can opt for a pre-owned home, which can cost you around $30,000. However, going this route means less control over how your space will be set up.

Besides upfront costs, there are unforeseen costs of tiny homes. These touch on zoning laws and installing a septic system if your house is off-grid. Moreover, other considerations such as installing renewable energy sources like solar panels would further push the cost of your tiny home upwards. 

Ongoing costs should also be considered. These include maintenance, utilities, and property taxes. 

You might also need to factor in the cost of furniture and home appliances, extra storage if needed, and home insurance. However, you can always find a way to make the most out of your small space for storage.

Requirements to get a loan

Accessing financing for a tiny home is going to depend on specific requirements. They include zoning regulations, the number of square feet it’s likely to cover, whether it can be certified as a recreational vehicle (RV) and whether it should be on a foundation or mobile. 

Your credit score is another critical factor that finance or mortgage companies consider before advancing any credit for your tiny home.  

To secure a loan, you must have excellent credit. A score higher than 670 will enable you to access an unsecured loan. Having a credit score of at least 580 will allow you to access a secured loan. A higher score would mean a lower interest rate. 

In terms of required loan documents, the typical documents you should present to initiate the lending process include:

  • Loan application form;
  • Proof of identity (state-issued ID, driver’s license, passport, etc.);
  • Proof of employment (pay stubs, employer’s contact information, income tax returns, bank statements);
  • Address proof (utility bill, proof of insurance, lease terms, etc.)

Tiny house financing options

Although a tiny house could cost you less than a traditional home, the sum you need could be less than the minimum allowed for a mortgage. Thus, finding financing through a mortgage might not be possible. 

Mortgage lenders have minimum limits on loan amounts and prefer offering financing for homes built on permanent foundations. Also, the size of most tiny homes is below 600 square feet, making them not eligible for a mortgage. 

So, if your chances of accessing a traditional mortgage are too low, you might need to consider going for alternative forms of financing. They include:

1. Paying with your savings

As you plan to purchase or build your tiny home, you might want to consider whether you have enough savings to finance it. If you do, it’s better to buy your house with cash. 

Going this route means you won’t have to struggle with any monthly repayment or the high interest rates associated with mortgages, personal loans, or other financing plans.

However, we know you’re reading this post because you probably have no savings, or what you have isn’t enough to purchase your tiny home. If this is the case, you can proceed and explore the other financing options in the next sections. 

2. Personal loan

A personal loan is among the most common ways one can secure financing for their tiny home. 

Personal loans can be used for many things, including purchasing your tiny home. You can get a personal loan of up to $100,000, ensuring you get the flexibility you need to acquire a tiny home. 

Personal loans are usually unsecured, so you don’t need any collateral to access them. This is what makes them appealing to many borrowers. 

One challenge with personal loans is the shorter repayment terms, with the period ranging from 2 to 7 years, compared to other options of tiny home financing. The implication is that you could end up with an unaffordable monthly repayment rate.

Another issue with a personal loan concerns the higher interest rates associated with it. A personal loan with a repayment period of 2 years could attract an interest rate of about 9.58%.

Still, your terms may not be much favorable even if you were to ask for a longer repayment period, as a lower credit score might affect your repayment timeline.  

3. Home equity loan or lines of credit

A home equity loan or line of credit works if you already own a permanent home and wish to add a tiny house. 

Ideally, the home equity loan facility allows you to take advantage of the equity already accumulated in your house and meant for renovations, large purchases, consolidating high-interest debt, or college expenses.

Usually, a home equity loan and home equity line of credit (HELOC) provide the best ways to finance large expenses. In this case, you’ll be taking the facility against the equity already built up in your house.

Equity stands for the difference in value between how much your house is worth and the amount still due on your mortgage.

You can tap this facility since you’ll use your primary residence and not your tiny home. In case you’re unable to repay your debt at some point, you could lose your home to your lender. 

Also, there could be limits to the amount you qualify to borrow. 

The maximum amount that most home equity lenders allow is equivalent to your loan-to-value ratio combined. Most lenders will allow you to borrow up to 85% of your home equity.

Since you’ll be using your primary residence as collateral, meaning you’ll be obtaining a secured loan, the interest rates would be lower than personal loans.

Once your loan is approved, you’ll receive the funds in a single lump sum. The repayment terms usually include monthly installments between 5 to 20 years. Sometimes, this can even go to about 30 years.

The interest rates as well as monthly installments for a home equity loan are fixed. This means there’s predictability for borrowers. This will make it difficult to borrow anything on top of your current loan.

A HELOC, on the other hand, also allows you to borrow up to about 85% of the equity of your home. However, with a HELOC, the interest rates can vary as they can change periodically depending on market conditions.

4. Recreational vehicle loan

A recreational vehicle-specific loan might be your best option for financing your tiny home. This is applicable only if you plan on having your tiny home on wheels. 

Among the other requirements to qualify for an RV loan is the need to certify your house as an RV. This is what organizations like the RV Industry Association do. 

You’ll also need a fixed address and good credit.

Unlike a personal loan, the interest rates of an RV loan for a tiny home are relatively lower.

The repayment terms could include a payment period of up to 15 years. 

Tiny home financial risks

Building or purchasing a tiny home can be a great way to own a home. However, with a tiny home, there are financial risks involved. These include:

  • Tiny houses are prone to disasters. This means in case of natural disasters like strong winds or hurricanes, you might end up suffering financial losses.
  • Unforeseen expenses. With a tiny house, especially one that’s pre-built, you might end up using more money to adjust it to your needs and preferences.
  • Potential construction corrections. There are cases where individuals have fallen for quirks to build their tiny homes. If this happens to you, you might end up using more money to correct the mistakes, which still might not meet your expectations even after the corrections.
  • Home insurance. It can be difficult finding one, and it could be costly.
  • Low resale value. Due to too much customization, the value of a tiny home could end up depreciating. This makes it difficult to sell it, and even if you were to sell it, the resale value is highly likely to be lower than the cost of building or buying it. 

Can you get financing for a tiny house with bad credit?

You can access financing even with bad credit. Financing options like personal loans can still be accessible even if you have a bad credit rating.

Other loan options can be available as well. However, there’s a catch to this. You might need to get a co-signer or guarantor, and it might be hard to get your loan approved if you don’t have one.

However, if your loan application is approved, you might have to pay high interest rates. In the end, this may not be a worthwhile idea as far as improving your credit history is concerned. 

Conclusion 

Tiny houses continue to become more and more popular. They're preferred mainly by those who wish to adopt a minimalist lifestyle. 

So, if you want to downsize your living conditions, then a tiny home is the best bet for you. It will change your life by making it simpler. 

But don’t forget the financial implications of getting yourself a tiny house. You can access various financing options, including personal loans, RV loans, home equity loans, or lines of credit. 

The only type of property loan you will not qualify for is the mortgage loan. 

You can even secure a loan with bad credit and make your dream of owning a tiny home a reality. Make sure to study all the possibilities and risks and make an informed decision.

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