Tiny Homes Are Booming—But Should You Borrow to Build One?

Tiny homes aren’t just for minimalists who want to live off the grid anymore. Many homeowners are building tiny houses, also known as accessory dwelling units (ADUs), in their backyards. These little structures can provide a variety of financial and lifestyle benefits, but they can be difficult to finance because they don’t qualify for a traditional mortgage.

Learn what your financing options are if you want to build a tiny house.

Why Are Tiny Homes So Popular?

ADUs—also known as granny flats or backyard cottages—are small living structures built on the property of an existing home. They might be built on a foundation or on wheels. There are many reasons you might want to build one. You could use it as:

• A long-term rental unit
• A short-term rental unit (such as an Airbnb)
• Space for guests
• A home for aging parents who want to be nearby

For homeowners, ADUs can provide a source of extra income or a means to help care for family members who require additional support. But some lawmakers in the United States see them as a solution to the country’s housing shortage.

H.R. 4568, the Supporting Upgraded Property Projects and Lending for Yards (SUPPLY) Act, is a bipartisan bill that was introduced in the U.S. House of Representatives in 2025. It is explicitly intended to increase the housing supply in the U.S. by making it easier for homeowners to get financing to build ADUs on their property.

Should You Borrow to Build a Tiny Home?

The cost of building a tiny house or ADU on your property will vary depending on:

• The size of the structure
• The amenities you include
• Type of construction materials (builder grade, luxury, etc.)
• Whether you are buying a tiny house kit or having a custom design made

Some property owners build their own ADUs, while others hire construction companies. You will also need to plan for costs such as permits, electrical, and plumbing. The average cost for installing an ADU on your property generally ranges from $20,000 to $50,000, but the price can increase depending on the materials and construction.

You might have that amount in cash on hand. Or you may end up financing the construction of your ADU. This type of financing can get tricky. Traditional lenders often won’t finance tiny houses because there aren’t enough comparable properties nearby to allow for an accurate appraisal.

If the SUPPLY Act passes, it will provide government-backed financing options to construct ADUs. But until the bill passes, there are other financing options available.

Personal Loan

Personal loans have few restrictions on how they are used, making them convenient for tiny house construction. When setting the terms of the loan, lenders will generally look at your credit score, other debts, how much you want to borrow, and the length of the loan.

• Pros: Flexible use; many borrowers can qualify for large amounts up to $50,000 or even $100,000; they don’t require collateral
• Cons: Shorter loan term (generally 12–60 months); higher interest rates than traditional mortgage (6%–36%, average of 11.57%)

RV Loan

If your ADU will be on wheels, rather than foundation-built, you might be able to take out an RV loan. To qualify, the tiny house must meet certain fire, electrical, and plumbing safety standards set out by the RV Industry Association (RVIA).

• Pros: Lower interest rates and longer terms than personal loans
• Cons: Must meet credit score, income, and primary residence requirements; may require a home inspection; often need a down payment of 10%–20%

Builder Financing

Some lenders partner with contractors who specialize in tiny house construction to offer third-party or in-house financing for ADU construction. In this scenario, the contractor who is building your home is also the one offering you financing.

• Pros: One-stop shop for construction and financing; likely willing to cover the whole cost of construction
• Cons: Difficult to change the builder you are working with; terms may not be as favorable as other loans

Financial Tips for Building an ADU

Know Why You Need It

Take time to consider the specific purpose your ADU will serve. Different uses will change how the unit needs to be designed and constructed.

A long-term living space, for example, will probably need a full kitchen, but a unit that will only be used by short-term travelers or visitors might only need a sink, mini-fridge, and microwave. If you plan to have parents living in the unit, you’ll need to plan spaces that allow for aging in place.

Knowing these requirements ahead of time will help you better estimate your construction costs. It can also save you money by helping you avoid costly changes or upgrades down the road.

Be Honest About Your DIY Skills

Many companies sell tiny house kits, and if you handle some or all of the construction, you can keep costs down. But taking on work that you aren’t qualified to do can end up costing more if you have to hire someone to fix your mistakes.

Be honest from the start about what you can do yourself and what you will need to hire someone else to handle. This will help you more accurately budget for your tiny house project.

Plan Your Financing Ahead of Time

You don’t want to get halfway through your project and suddenly find yourself scrambling for financing to finish it. Have a plan for how much the project will cost, both in terms of money and time.

If you are working with a construction company, take the estimate you’ve been given and budget for an additional 10%–20% to account for changes in material availability, tariffs, extra labor, and other unexpected costs.

Then, examine how those costs align with your budget. What can you afford to cover, and what will you need to finance?

If you will need financing, don’t rush to make a decision. Consider all the available options and take the time to choose the one that best suits your financial situation.

Research Local Regulations

Just because you are building on your own property doesn’t mean that you can do whatever you want. Local laws and regulations will impact what, where, and how you can build.

For example, residential zoning codes can limit the number of structures that may be built on a property or whether accessory dwelling units are permitted at all. There may be restrictions on how close buildings can be to the property lines or whether you are allowed to rent out units for short- or long-term use. Ensure you thoroughly understand all local laws and regulations that affect your ADU before commencing the building process.

The Bottom Line

Tiny homes—also known as ADUs or granny flats—are an affordable way to add rental or family space, often costing under $50,000 to construct. But financing can be tricky. The 2025 bipartisan SUPPLY Act aims to make loans for ADUs easier to get and help grow the U.S. housing supply, but until it passes, there are other options for financing your ADU.