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What is a Chattel Mortgage?

Couple talking with lender at coffee shop

There are a number of loan programs for homeowners in 2020. Unfortunately, with so many options available, it can be challenging to find the right loan for your situation. This is especially true for borrowers looking to finance their manufactured home.

Manufactured homes

A manufactured home is considered a factory-built home constructed after June 15, 1976. These homes are built on a permanent metal chassis and are required to meet safety standards set by the U.S. Department of Housing and Urban Development (HUD). It’s important to know that moving this type of home after installation can interfere with financing.

Mobile homes

Mobile homes, on the other hand, were made before June 15, 1976. We only mention this because such homes were built before certain safety standards were put into place. Very few lenders today will lend on a mobile home.

Modular homes

Then there are modular homes. In contrast to manufactured and mobile homes, these homes must adhere to the same local building codes as site-built homes. Of these three types of homes, modular homes are usually the best investment.

Financing options for manufactured homes

Now that you know how to differentiate manufactured homes, let’s get into the financing aspect. Triad Financial Services explains that you can purchase a manufactured home with a conventional mortgage as long as it’s permanently affixed to a HUD-approved foundation. What often complicates things is when a manufactured home is deemed personal property.

Understanding a chattel mortgage

In short, a chattel mortgage can be used to refinance or purchase a manufactured home that’s not permanently attached to land. The chattel, or movable property, guarantees the loan and the lender backs it. You may hear this type of loan referred to as a security agreement, depending on where you live.

So how does a chattel loan compare to a standard home loan? For one thing, chattel loans are typically much shorter than with a traditional mortgage. There’s also the fact that processing fees and loan amounts are up to 50% lower on these loans.

The one obvious downside of a chattel mortgage is a higher interest rate. In fact, the APR on these loans averages nearly 1.5% higher than standard home loans. That means you’ll have to get used to more money coming out of your account every month during your repayment period.

How it works    

If you get approved for a chattel mortgage, your lender will hold a lien against your manufactured home. The lien, which is used as collateral for the loan, protects your lender’s interest in the property should you ever fail to hold up your end of the contract. This gives them the ability to repossess the home and sell it to pay off the debt. 

Alternative loan programs

Chattel loans aren’t for everyone. If you would prefer a government-backed loan program for your manufactured home, we suggest looking into an FHA loan. These loans are insured by the Federal Housing Administration and offer relaxed credit score requirements, low monthly mortgage insurance, and low down payments. 

Here are two FHA programs worth considering for your manufactured home, as referenced from The Balance.

FHA Title I loans

These loans are reserved for borrowers who won’t own the land upon which their residence sits. Good candidates for this FHA program are those who can verify two years of steady employment and less than two 30-day late payments to debtors in the last two years. You may be able to qualify for as little as 5%, depending on your lender.

Title I loans require that the manufactured home be your primary dwelling. On top of that, the installation site must include water and sewer service. Get in touch with a HUD-approved appraiser if your manufactured home is brand new. 

FHA Title II loans

Worried that a less-than-perfect credit score will keep you from qualifying for a mortgage? With an FHA Title II loan, you can finance your manufactured home with a credit score as low as 560.* Additionally, you can use gifted money from a loved one to fund your down payment and closing costs. You may even be able to negotiate with the seller to have them help with these costs.

As you can see, there’s a lot to like about FHA Title II loans. Just know that because it’s a real estate loan, you’ll have to purchase the home and the land together. Your lender will require that the home be permanently installed on an approved foundation system, such as concrete.

*FHA, VA, Conventional, and USDA loan requirements are subject to change. Jumbo and non-QM loans may be temporarily unavailable. As a result of COVID-19, mortgage investors are unable to support as many loans, meaning underwriting guidelines for government and conventional loans are becoming more strict.  

Is it the right mortgage for you?

While a chattel loan may make sense for you, it may not be the best option for your friend or coworker. That’s why we recommend working with a dedicated mortgage consultant* before assuming it’s the only way to finance your manufactured home. 

*American Financing does not offer chattel mortgages.

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