Making Your Tiny House (or Other Unconventional Home) a Reality
Financing, Permits & Home Insurance:
Owning a house is part of the American dream, and today there are more ways than ever to make that dream a reality. Do-it-yourselfers are turning to alternative options, from tiny houses, whose tiny prices offer potential mortgage freedom, to efficiently designed modular homes or even wildly unconventional options (homes built from plastic bottles, shipping containers and other reclaimed materials).
But financing and building these alternative homes can be complicated, so buyers need to do extra planning to avoid unpleasant surprises. Here's our advice for financing, permitting and insuring the new American dream homes.
Dreaming of a sustainable, eco-friendly lifestyle without the financial burden of a traditional mortgage? A tiny house may be the answer. Tiny houses' cleverly designed interiors (which are usually 100-400 square feet) feature all the main comforts of home with no wasted space. And they're often built with green materials and utilities. While the average manufactured tiny house is $200-$400 per square foot, skilled do-it-yourselfers using salvaged materials can cut costs even further. But those without cash on hand may struggle to find financing and many zoning boards have yet to accept tiny houses. Before you downsize, find out more about:
Since the major components are built in a factory, a modular home can be built faster and cost 10 to 20 percent less than a traditional home. And though they typically offer fewer customizations than traditional homes, modular homes can be found in a wide range of styles, from value to luxury. However, you'll probably have to hire a separate contractor to prepare the site, build the foundation and assemble the house, so the "finished price" could be double the "base price." Before you make the move to modular, learn more about:
Some do-it-yourselfers make radically eco-friendly homes from unconventional or reclaimed materials. These homes might look wacky to outsiders, but they make perfect sense to owners seeking a small carbon footprint and an independent lifestyle. Homes made of shipping containers have become a thriving submarket because of their inherent modularity (they're all standard sizes) and low cost (typically $1,000-$2,000). Other unusual housing materials include bags of earth, which are cheap, structurally sturdy and naturally good insulators, as well as discarded bottles and pallets, which haven't reached critical mass as a trend or gained recognition from banks and local zoning boards. Find out more about:
Purchasing Your Alternative Home at a Glance
More to the point, where can you build it? Modular homes can be built anywhere a conventional home can. But because tiny houses are a relatively new category, many communities don't allow them. More offbeat DIY homes face even more uncertainty. Do plenty of research to determine exactly what's possible (and legal) before committing to a location or spending any money.
Lending institutions are inherently conservative, which means they're often reluctant to take risks on new types of property like tiny houses or houses built from reclaimed materials. While a modular house can be financed with conventional mortgage products, other alternatives often require more financial creativity.
Once again, options abound. With a modular home, choosing an on-site contractor that has already worked with the modular company can make the construction process go more smoothly. If you're building an alternative home by yourself, your skills for paperwork (in applying for permits, for instance) and carpentry should be up to the task. And make sure you're complying with local building codes.
Sample Budgets for Alternative Homes
Sample Budget for a Tiny House
If you're purchasing a tiny house on wheels in Florida, here are the costs to keep in mind. Many of these costs will remain the same no matter where you live, but the cost to stay in an RV park may vary greatly depending on your location.
Base price for tiny house on wheels
Cost of a moderately priced tiny house on wheels (including trailer, which is integrated into the tiny house).
$2.00-$2.50 per loaded mile or $35,000 and up
Price for a moving company to transport tiny house from manufacturer to RV park (though some tiny house builders will deliver locally for free) Price to buy a truck big enough to transport a tiny house (if you plan to move from place to place)
Set of four RV jacks to stabilize the tiny house on site at an RV park
$300-$800 per month
Fees to stay at an RV park (including water, sewer and electricity). Fees are higher in winter, lower in summer.
Sample Budget for a Modular Home
Most modular companies will work with you to prepare a detailed estimated budget for your entire project before fabrication begins. This sample budget gives a general picture of the additional costs — beyond the modular home company's "base price" for factory-built modules — that you might encounter for a 2,000-square-foot, mid-priced suburban home in the Northeast.
Base price for modular home
This budget assumes a base price of $85/square foot for a standard design package. (Prices can vary from $50/SF to $300+/SF depending on the company and the home.)
This could include customization of the design package, structural engineering, foundation design and ensuring compliance with local codes.
Includes changes such as adding a full basement instead of a crawl space, porches, garage, upgraded fixtures and finishes
$5,000-$10,000 depending on the site. Includes excavation, tree removal, grading, etc. A local contractor can provide estimates.
$10 per module per mile. Cost includes shipment of the modules by truck, plus at least one "pilot" car to warn other drivers.
Installing modules on foundation
$1,000-$2,500 per module, plus crane or other mobilization
$10-$15/SF for crawl space, $15-$25/SF for basement
$10-$20 per modular SF to connect modules to each other; installation of siding, roofing, drywall, finishes; connecting plumbing, heating, electrical
$1,200-$20,000 depending on site. Connecting to existing utilities on a small suburban lot is relatively inexpensive. Installing new utilities on an undeveloped lot costs much more.
Permitting requirements and fees vary widely by community. Contact your local building department to find out what's necessary for your home.
Not included in this budget because costs vary so widely, and because it's usually financed separately from the C2P loan for the modular home.
5% contingency for unplanned expenses
Total finished price
$160/SF (approx.). This is the amount you'll need to finance.
The Rolls-Royce of reclaimed materials, shipping containers cost about $2,000 each, though the cost may vary depending on your contractor's wholesaler, says Kurt Witten. Transporting these steel behemoths to your property can cost another $1,000 each. Construction might require cranes to position the containers and welders to cut openings in the steel, which could go beyond the ability of most DIYers. Prices for professionally built homes range from $20,000-$30,000, for structured shells advertised on eBay, to $300,000 for a custom design with high-end fixtures and finishes.
Discarded plastic bottles (which are free) can be filled with sand or dirt (also free) and act as "bricks" that can be stacked in rows and held in place with mortar or cement (extremely inexpensive). Use reclaimed wood for doors and windows, add a green roof and voilà! You have a sustainable home that's literally dirt cheap.
Financing Your Alternative Home
If your alternative home will appreciate or depreciate in value once it's built, you can probably get a mortgage. But in some cases where little precedence exists, you'll need to explore other financing options. As with zoning and building codes, financing is simpler for more conventional homes. But as alternative homes grow in popularity, more financing options are becoming available.
Tiny House Financing
Banks generally do not offer mortgages for tiny houses because they tend to depreciate in value. This means you'll need to find other ways to finance one. Here are some options:
If you're purchasing a tiny house on wheels from an RVIA-certified manufacturer, you can get an RV loan, which is similar to a car loan, with the tiny house serving as collateral. Expect a 15 percent minimum down payment and interest rates from 3-9 percent, depending on your credit score and the loan amount.
Unsecured personal loan
Also called a signature loan or personal loan, this is not secured by collateral, so you'll need a good credit score (or you'll face very high interest rates). Interest rates can be as low as 5.99 percent for someone with excellent credit to 15 percent or higher for someone with fair or poor credit. Companies like Tiny House Lending specialize in matching tiny house shoppers with a lender based on their credit score, location and amount they want to borrow.
Home equity loan
If you're building your tiny home as a second home, you can use the equity from your primary home to take out a home equity loan or a home equity line of credit. A home equity loan is a lump sum that's usually limited to 85 percent of the equity you have in your home and the loan is payed off just like your mortgage, in equal monthly payments over a set term with a fixed interest rate. A home equity line of credit (HELOC) is an available amount that you can draw from multiple times and it often has an adjustable interest rate.
If you're purchasing a pre-made home, rather than building it yourself, many tiny house companies offer their own financing.
Some do-it-yourselfers solicit sponsorships from companies, offering to trade services or blog about the products they're using in exchange for free or discounted items used to build their homes.
Borrowing from friends or family
There are no hard and fast rules for borrowing money, but this will probably work best if you arrange to pay enough interest to make this a good investment for your friend, and have a lawyer prepare a formal loan agreement.
A thrifty DIYer can build a tiny house from reclaimed material for as little as $10,000, none of it borrowed. Others save until they have enough cash to buy or build a more expensive tiny house.
Modular Home Financing
The typical homebuyer secures a conventional mortgageor FHA loan to finance the purchase of a fully built home and the land it sits on, and then the homebuyer pays the bank in affordable monthly installments. Financing a modular home is different because the land is usually purchased (and financed) separately from the house, and the construction process must be funded as well as the home itself once it's built.
Most modular companies recommend getting a construction-to-mortgage loan — also called construction-to-permanent, C2P or "one-close" financing because one set of closing costs covers both sides of the loan. A bank offering C2P loans can give you information about financing tailored to your modular home, including credit score, interest rate and payment terms. Here are the basics of how C2P financing works, with help from Tim Woods, a loan officer from Umpqua Bank in Santa Rosa, Calif.
1. Down payment
Unlike in a conventional mortgage, where the down payment is a percentage of the price of the home, the down payment on a C2P loan depends on the "appraised future value" of the home once it's built, with the bank lending up to 80 percent of that amount, according to Woods. The bank makes this appraisal before construction begins by comparing the plans for your modular home to comparable properties in the area.
2. Approval process
As with a conventional mortgage, the bank will scrutinize your finances, including credit score, employment history, income, debt and other factors. For a C2P loan, the bank also needs to approve the modular company, the on-site general contractor and any subcontractors. A line-item budget for constructing the home also must be established, so C2P financing can't be approved until the home design is finalized down to the last detail. This process can take several months.
Closing encompasses the construction and the mortgage phases. This means the mortgage terms can't be changed after this point, even though the mortgage won't begin until construction is finished in several months or even a year. Closing costs (usually 2-5 percent of the loan value) are paid at this time.
4. Draws during construction
The bank makes scheduled disbursements, or "draws," so building materials can be purchased and contractors can get paid. After each major milestone (such as setting the foundation), the work is inspected, the contractor requests payment for that work and the bank releases those funds. The largest draw is usually paid to the modular company when the factory-built modules are delivered.
5. Borrower payments during construction
Until construction is finished, you pay only interest on the money spent to build the house up to that point. You must also pay local property taxes, even if the house isn't finished.
6. Transition to mortgage
After construction is complete, the financing converts to a conventional mortgage. In most cases, no extra paperwork is needed, and "the transition is seamless," says Woods. After this, you begin making monthly mortgage payments to the bank.
If the borrower defaults on payments at any point (including during construction), the bank will send a Notice of Default, finish the project and resell the home to recoup its investment, says Woods.
One-of-a-Kind Home Financing
Not just for mavericks anymore, shipping containers are becoming more popular — and more likely to get financing. Kurt Witten of Kustom Container Builders says his clients typically finance their shipping container homes with personal loans or mortgages. Some lenders also provide construction or C2P loans, especially in markets where comparable properties exist. For all of these financing methods, "It's up to the customer to sell their idea to the bank," says Witten.
If your dream home is a DIY, solar-powered, carbon-zero yurt, mortgage debt probably isn't part of your vision for sustainable living — and financing typically isn't available anyway. Fortunately, the ultra-low cost of many reclaimed materials makes it easy for maverick homebuilders to raise the cash they need.
Permits for Your Alternative Home
Your new home must comply with local zoning and building codes, which protect safety (and property values) in a community.
These determine where in a community new residences can be built, what kinds are allowed (such as single-family dwellings or apartments) and other factors such as size, height and distance from the street.
Most communities also require building permits. This involves the submission of detailed construction plans to ensure compliance with International Building Code (IBC) standards for structural soundness, fire safety, electrical wiring, etc., as well as additional local building codes enforced by communities. Permits (and permitting fees) may also be required for things like new utility lines and driveways.
Densely populated communities often have more restrictive zoning and higher permitting fees, so do plenty of research before committing to a location.
Tiny House Permits
Tiny houses are too small to be zoned as residences in many communities, even if they're built on foundations. This means you can't simply build a tiny home on your own property and live there full time, unless you're in a rural area with minimal zoning. One work-around is to apply for a zoning variance, but there's no guarantee you'll get it. Another solution is to put your tiny house on a property where there's already a primary residence; you can then certify the tiny house as an ADU (accessory dwelling unit). Regardless of its size, if a tiny house is built on a foundation, it must comply with local building codes, even if local zoning codes don't recognize it as a residence.
Some tiny house enthusiasts can sidestep local zoning and building restrictions by registering a tiny house on wheels with the DMV as a trailer or RV. However, an RV, by definition, is intended for recreation, not full-time living, which can create challenges. For example, tiny home RVs can't be occupied long-term in many residential communities, with maximum stays ranging from a few days to a few weeks, as if you were camping.
If you want a tiny house RV to be your primary residence, an easy option is staying long-term in an RV park. Many RV parks require that tiny houses be certified by the Recreational Vehicle Industry Association (RVIA), which sets construction standards for highway safety, heating, plumbing, electricity and fire safety, among other things. Some commercial tiny house builders are RVIA-certified. Do-it-yourselfers are not eligible for RVIA certification.
Elaine Walker of the American Tiny House Association explains that when most building and zoning codes were written, "those small structures weren't meant to be residences. But some communities are removing the minimum square footage requirement. It's going to take more time."
Modular Home Permits
Modular homes are subject to the same zoning and building codes as traditional houses. This means that if your property is zoned for residential housing, you'll be able to build a modular home there. It also means you'll need to comply with the myriad building codes and permitting requirements that apply to new constructions.
Building on undeveloped property will require permits for site work and utilities. If you're tearing down an old house to build a new modular home, you'll likely need a separate demolition permit. Many modular companies will ensure that the house itself meets local codes and prepare the required construction drawings, and some, like Blu Homes, will provide their own on-site contractor. Be sure that if you hire your own on-site contractor that he or she is doing the same for site work and that all required permits are obtained.
Permitting fees can range from $2,000 for a suburban home that doesn't require any site work to $15,000 for a home on a larger property in Northern California (where both the topography and the codes are complicated), and up to $30,000 or even $50,000 for a large-scale, complex project with extensive site work.
One-of-a-Kind Home Permits
As with tiny houses, zoning and building codes don't yet recognize most homes built from reclaimed materials. Shipping container homes may be restricted by local zoning codes, so do some research to find out where you can build. A shipping container home will also need to comply with all local building codes and permitting requirements for things like sewer and utilities.
Some communities will approve an earthbag home if an architect or engineer signs off on the design. Homes that are more unconventional (those built with pallets, hay bales, recyclable bottles or other materials) are even trickier zoning-wise. Building permits can also be a challenge since IBC, which is all about uniform standards, is difficult to apply to one-of-a-kind structures. Many unconventional homebuilders sidestep these complications by living in remote areas with few or no zoning restrictions for a truly "off-the-grid" lifestyle, opting for solar power and composting toilets instead of electric and sewer service.
Home Insurance for Alternative Homes
How do you protect your investment? As with everything involving alternative homes and the conservative institutions (banks, zoning boards) that dictate the housing market, some types of homes will be much easier to insure than others.
Insurance for Tiny Houses
A tiny house on wheels must be insured to meet federal motor vehicle safety standards. Fortunately, if it's RVIA certified, you can get RV insurance, which covers collisions and injuries on the road, as well as damage to the RV itself and the property inside it.
A tiny house that's used as a long-term residence is more complicated. According to Darrell Grenz, an independent broker in Portland, Oregon, the lack of uniform building codes and the ambiguity about whether a tiny house is a vehicle or a residence can make standard insurance carriers reluctant to insure them. Many people living in tiny houses on foundations go without homeowners' insurance or make due with renter's insurance to protect the personal property inside the home.
Grenz partnered with Lloyd's of London to provide coverage specifically for tiny houses, including course-of-construction policies for do-it-yourselfers. A homeowner's policy from Grenz's agency costs about $500-$700 per year and protects against "the normal perils of homeowners," including wind and fire.
Insurance for Modular Homes
Getting homeowners insurance for a completed modular home is pretty straightforward, with rates and terms similar to those for conventional homes. Because the fabricated components must withstand the stress of travel from factory to property, modular homes often are sturdier than stick-built homes, making them a good risk for insurers. While it's being built, a modular home also must be protected with course-of-construction insurance, which can cost $3,000-$5,000, according to Tim Woods, and will protect against theft of building materials, vandalism and accidents on the worksite.
Insurance for One-of-a-Kind Homes
Shipping container homes are unique in that they are alternative homes that insurers actually like, making it possible for you to get more traditional homeowners insurance. ISBUs (Intermodal Steel Building Units, another name for shipping containers) receive excellent fire and safety ratings due to their solid steel construction.
Little information exists regarding insurance for homes built from other reclaimed materials. It's safe to assume that getting standard homeowners insurance for such nonstandard structures is difficult or impossible.
What If You Can't Get Home Insurance?
If you can't get homeowners insurance, it's a good idea to get renter's insurance to protect the property within your home. Though an earthbag home can be constructed for just a few thousand dollars, the possessions inside it could be worth more. And, of course, it's always wise to build to the highest possible standards for structural soundness, fire safety, etc., to protect your investment for when the next five-year storm blows through town. The cost of reclaimed building materials may have made your financial risk low, but losing all the time you spent building a one-of-a-kind house by hand is another story.
Resources for Alternative Homes
American Tiny House Association
This organization provides resources and support for tiny house enthusiasts. Visit their website to find information on building codes, regulations and advocacy for tiny houses.
Darrell Grenz Insurance Agency
Insuremytinyhome.com, based in Portland, Ore. specializes in insurance for tiny houses.
Recreational Vehicle Industry Association (RVIA)
RVIA provides information on standards and legislation for recreational vehicles, as well as a directory of RV manufacturers and RV campgrounds.
Tiny House Lending
Specializing in tiny house funding, this company matches customers looking for personal loans with lenders based on their credit score, location and amount they want to borrow.
Tumbleweed Tiny House Company
Design and order custom tiny house RVs, purchase trailers, or take workshops about tiny house living from Tumbleweed Tiny House Company, which delivers across the U.S.
Blu Homes offers prefab modular homes in Northern California, with a focus on quality construction and green building standards.
National Modular Housing Council (NMHC)
NMHC provides a directory of modular home manufacturers as well as information and resources for those looking to build or buy a modular home.
With over 20 customizable designs, Stillwater Dwellings offers a wide range of modular homes that can be tailored to your building site, budget and lifestyle.
Container Home Plans
Looking to build your own shipping container home? This website offers information and building plans for DIY-ers.
This website provides photos, articles, videos and more for home builders looking to construct an earthbag house.
Natural Building Blog
Interested in natural building methods? Find information and building plans for earthbag and other homes.
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