After 3 years of traveling in my camper van, and then trying to adapt to a global pandemic, I decided to fast track my dream of building a farmstead and buy an off-grid house on 5 acres with my fiancé. Little did I know how many obstacles there would be to obtaining this dream. So I wrote this post to share what I learned along the way about financing an off-grid house.
Since I work 100% remotely, moving off-grid (and in the middle of nowhere) was a great way for my partner and I to lower our cost of living.
Originally, we dreamt of buying land and building a tiny home, since we thought that would be the most affordable option.
However, I quickly uncovered multiple legal and financial obstacles to my dream of living in a tiny home off-the-grid.
Things to know if you are considering getting an off-grid tiny house:
- There are varying restrictions and regulations on tiny houses in the U.S. at the state, county and subdivision level in the form of:
- a minimum square footage requirement for your home
- requiring a septic tank or being hooked up to the grid for sewage (meaning you can’t have a composting toilet)
- requiring a permanent cemented foundation
- Tiny Houses are not that cheap and can range from $35,000 to $100,000 already built and at least $15,000 to $30,000 to build it yourself (and none of that cost includes land OR a septic system if required by your local ordinances)
- It is difficult to get financing and insurance on a tiny house
- Tiny Houses don’t appreciate in value, so they aren’t a great investment if you need to sell it down the road
You can learn a bit more about the obstacles and loopholes in my video Why I Bought an Off-grid House (Instead of a Tiny House). I also go over how we proved our income as freelancers in order to get the bank to approve our mortgage in the video.
So after mulling over all these obstacles, we decided to buy a small existing off-grid house, so we could pursue our dream of becoming self-sufficient and lower our cost of living.
Then, we discovered that it’s not a simple process to get financing for an off-grid house either.
Getting a Mortgage and Financing an Off-Grid House
First and foremost, you need to know that big banks like Chase, Bank of America, and Wells Fargo won’t offer loans on homes that are off the grid.
But I’d argue that it’s better for the planet and your community to go with a local bank anyway. Community banks invest in the community, while banks like Chase have a long history of investing in fossil fuels. Chase alone has invested $268 billion in the fossil fuel industry. To learn more about ethical banking, check out my post on socially responsible banks.
Off-Grid is classified as a home that is not connected to the electrical grid through power lines, but this typically also applies to homes that don’t have access to a city or town water supply. It also can apply to homes or land that are not connected to sewage treatment (meaning they need a septic system). Basically, banks consider off-grid homes a risk, because if you default on your payments and have to foreclose, the bank doesn’t see the property as an investment that will be easy to sell.
Your best bet for getting financing for on an off-grid home will be through local and community banks and credit unions who will take off-grid loan applications into consideration on a case by case basis. Zillow Home Loans will also make exceptions for some “off-grid” homes if they can find a decent amount of comparable homes nearby and if they come with a decent amount of land. However, their interest rates were quite a bit higher than community/regional banks (in October 2022 they ranged from 6-8%, when local banks were offering as low as 4%), it is worth noting that they required less of a down payment though.
We personally ended up getting our mortgage through a local community bank.
If and when you find a bank willing to lend a mortgage for an off-grid home, they will typically include some form of an interest rate penalty and/or a special down payment loan requirement (explained further below).
Non Traditional Home Interest Rate Penalty
Once you find a bank that will take on your off-grid home, usually as a “special risk investment”, you will most likely have to pay an interest rate penalty, because off-grid properties are often not considered traditional/conventional homes.
The standard interest rate penalty is 1% on-top of the market rate for a home mortgage at that time. This is what we had to pay.
Off-Grid Home Mortgage Down Payment Requirements
The bank you find that is willing to lend a mortgage for an off-grid home, may also have a larger percentage down payment requirement. We encountered banks requiring 30-35% down, meaning the max they would lend is 65-70% of the home’s value. So if the home you want is priced at $100,000, you would need to put down at least $30,000 in cash down and the bank would lend you $70,000. These percentages differ from bank to bank, with some having a flat percentage down payment requirement for off-grid homes, and some have a specific formula, for example: they require 5% extra down for off-grid from power, extra 5% for off-grid from water, and extra 5% down for off-grid from sewage collection.
Shorter Term Home Loan
Since you will likely be penalized with a higher interest rate from the bank when financing an off-grid home, I recommend getting a shorter-term mortgage if at all possible. A 10 or 15-year mortgage will come with a lower interest rate than a 20 or 30-year mortgage.
Choosing a shorter-term home loan will also allow you to pay off your home sooner. It is important to note that it will increase your monthly payments upfront, but it will save you a lot of money in the long run by helping to counter the cost of the off-grid penalties and lower your interest rate.
We ended up getting a 15-year fixed-rate mortgage and our interest rate is 2.6% (that includes the 1% penalty).
We also chose a fixed mortgage, since interest rates were so low when we purchased our home and it ensures that our interest rate will never grow, even if the market changes.
Getting an Off-Grid Electric System Incorporated Into A Mortgage
If you are looking at an off-grid house without a current electricity source, and you don’t have the funds to install a solar, wind, or hydro-electric system on hand, it might be beneficial to negotiate the cost of an electric system into your mortgage.
Financing a solar or wind energy system can be expensive, and depending on your interest rate for your mortgage, it is probably cheaper to incorporate this system into your home loan rather than finance it separately.
When we put an offer on our house it did not have a renewable energy source. The previous owners were living off of a gasoline generator. So we contacted a local renewable energy company and got a quote on how much it would cost to install a solar electric system for our energy needs.
We then incorporated that cost into our home loan. This method also helped us get the house for much cheaper than it was listed for, because we were able to negotiate this cost and the hassle of doing it ourselves into our lower offer.
Basically, our offer said we will buy the home for “x” amount, and “y” amount will be for installing a solar electric system (meaning the bank pays for it and that money does not go to the seller).
Even if you choose not to get your electric system incorporated into your loan, it is probably wise to get a quote so you know how much to reserve for this cost before you put an offer on an off grid house that doesn’t already have a sustainable electric source.
This concept applies to septic tanks, water systems or a well too. If the home you are interested in doesn’t already have any of the basic necessities, I would get a quote first and make sure you incorporate the cost of installing these into a lower offer on the house.
Other Tips and Things to Note When Buying An Off-Grid House
Make Sure You Will Have a Reliable Water Source
When you move off-grid, it typically means you are not hooked up to a cities water system, in addition to being off of the electrical grid. So it is very important that you make sure the location where you want to buy has some source of water or you have a plan for getting water. Whether that’s an existing well, rain catchment system, or a nearby source for you to haul water from or get it delivered.
If there is not an existing system, you can obviously install your own rain catchment system or well, but you’ll need to know how far down the water table is and how much rain/snow your area gets annually.
If you plan to drill a well, get a quote first so you know what you’re getting into, if your area gets a lot of precipitation, you should be good to go on a water catchment system.
For us, we knew right away that our land was at least 1000 feet above the water table, and that drilling for a well would have been ridiculously expensive because of the terrain (~$65,000). Our area also only gets about 10 inches of rain per year and about 40 inches of snow. But there was a community well less than half a mile away that sells water for about 3 cents/gallon. So we decided we could handle that cost and then eventually built a rain/snow catchment system.
Note: the harder it is to get water, the cheaper the land and properties will probably be. So if you are willing to work for your water (like we decided to do), you can probably find a cheaper off-grid home.
Take Advantage of Renewable Energy Tax Credits
Whether you install or expand on an already existing renewable energy electric system (wind or solar energy) for your off-grid house, you can get a federal tax credit for the amount you spend on the system (this includes materials and labor).
A tax credit is a dollar-for-dollar reduction in the amount of income tax you owe. Some states even offer additional tax credits or other financial incentives, so make sure to check. This may change each tax year, so just google ” renewable energy tax credits” for the current year.
Research Comps in the Area You Want to Buy
Before we made an offer on our house, we went on Zillow and looked at what similar houses (and bigger houses with more amenities and more land) were selling for.
Knowing how much a bigger house with solar already set up and more acreage was selling for, really helped us negotiate a lower price.
Get An Inspection Before You Make an Offer
Before we made an offer on our house, we researched comparable properties nearby and requested an inspection.
The bank will do an inspection before they will approve your loan, but it is wise to get your own first so you can be more informed about what you are getting into and if the property is even worth your time. It is also good to have proof of things to negotiate for a lower offer.
For example, our inspection showed a number of things wrong with the house that needed to be fixed and basically gave us a checklist of what we needed to do and reasons why we should pay less for the property.
When we viewed the house, we also took a number of pictures ourselves of things we identified as potential problems or concerns and I included these pictures and a detailed list in my offer letter for the house to explain why our offer price was dramatically lower than the asking price (and it worked!!).
Check to See if the Seller has More Land
Our house was only listed as 2.5 acres, but we really wanted more land, so we asked the realtor, and it turns out the seller owned another 2.5 acres adjacent to the land with the house on it that they weren’t planning on selling. So we made an offer on that land too, and they accepted!
This “hidden extra land” concept is actually pretty common when you are looking for off-grid properties. Most of the 10 or so plots of land that we looked at in Arizona, New Mexico, and Colorado were listed as a certain amount of acreage, even though the seller owned a lot more land and was parceling it out to sell separately so they could potentially make a bigger profit or just make sure they were selling land in more obtainable chunks for the average buyer. Often sellers will give you a deal if you buy more than one of their parcels.
I hope this post helped answer some questions you might have had about financing an off-grid house. If you liked it or would like to save it for later, please pin one of the pictures below.
That sure looks and sounds like Northern AZ?
Thank you for this article! I too have traveled and backpacked around the world for missions and had my heart set on buying a tiny house but, like you mentioned, wasn’t allowed in MI due to zoning laws. I put in an offer on an off grid house on 20 acres and they accepted. It does have a pre-xisting well and septic but nothing else is up to code. And i have absolutely no idea what I am doing when it comes to solar power. I also was not aware that you can’t mortgage an off grid home. Your tips and tricks have been very helpful! I have 3 more days to back out if needed. You’ve given me a lot more things to look into before I stick with it. Thank you!
Hi Denae, So glad my post helped give you some things to look for and think about. I hope it all works out with your off grid house (20 acres is a dream)! I have a whole other post on the cost of everything to get a “homestead” style off grid house up and running, which addresses the cost of a solar electric system, if you’re interested, you can check it out here: https://www.spintheglobeproject.com/cost-of-living-off-grid/
Hi Denae! I’m currently seeking financing for an off-grid house in MI! It’s in the UP in Iron county. Do you have any leads on local/community banks or credit unions for me who might be able to help me out?
Thank you so much for providing such a piece of valuable information, these are some of the important things we have to keep in mind while buying a new house.
Thank you so much for providing such a piece of valuable information, these are some of the important things we have to keep in mind while buying a tiny new house.
I been trying to find a off grid rural affordable financed land option for sometime. Happy to correspond with you and any referrals greatly appreciated. Thanks so very much email@example.com