We’re in the process of building and buying a manufactured home in a community where we lease the land. Financing this type of home purchase is different than a traditional mortgage; it’s considered a chattel mortgage. Definition: A chattel mortgage is a loan on movable personal property.
But let’s step back for a moment and look at what kinds of manufactured homes qualify for financing, because not all of them qualify. For instance, the stereotypical trailer homes that are over 20+ years usually don’t qualify for financing. These are the ones of yesteryear that look like an RV without the wheels. Many times these same residences are registered with the department of motor vehicles because at one time they were a motor vehicle! Also, manufactured homes that actually look more similar to a home, but are older, that lack updated code requirements usually won’t qualify for financing either.
So what manufactured homes do qualify for a mortgage? Newer homes or ones that have kept up to date with code requirements, i.e. earthquake, flood, wind, etc. Qualifying for a traditional or chattel mortgage is pretty much the same process. Both require good credit scores for the best rate, a down payment, and verification of income to support the monthly payments. However, a chattel mortgage has higher interest rates which currently range from 6% to 12%.
Say what?! Okay, the 12% sounds crazy high and I can’t imagine anyone taking that high of an interest rate on a loan, but those are the current rates at the moment.
With the higher interest rates comes a higher monthly payment. Here’s where a chattel mortgage is also different – not only do you have to qualify for the loan, but the bank and home community have to verify that your income will support the loan amount AND the land lease amount. A potential buyer also has to be approved by both the bank and community, so the process might take a little longer. In our case, the community took a couple of weeks longer than the bank.
Let’s run some numbers for a better visual: In a traditional mortgage, if you make $90,000 a year and have a 10% down payment, you might easily qualify for a $350,000 loan amount. Not so with a chattel mortgage. Instead, with these same figures, you might only qualify for a loan in the low $200,000’s so that you have enough to pay the land lease as well.
Land leases vary by state and community, so it’s hard to predict the national average. Where I live in the Los Angeles area, land leases range from $700 upwards of $1,500 depending on the community. This obviously impacts the total monthly payment and might limit how much you can spend on a home if the land leases are expensive.
You might be thinking: Why the heck would someone want to purchase a manufactured home on leased land with these figures?! Often, the total monthly expense is less than owning a home even factoring in the land lease and mortgage. For instance, if your land lease is $800 and your mortgage on the home is $900, the total cost including insurance and property tax (only paid on the home) is around $1,900 a month. In expensive states, like California, this is a smokin’ deal. (In other states, the cost is much less and still a deal.) Another reason is downsizing. Many manufactured home communities have older couples who have downsized. Less home to take care of and barely any yard to maintain. The idea of community is also another appealing reason.
So let’s recap on financing a manufactured home: 1.) Not all homes qualify for financing. Newer ones do. 2.) Have a good credit score to get the best rate, which at the moment is around 6%. We have credit scores in the high 700’s/low 800’s and were approved at 6.75%. 3.) Make sure you have a 10% down payment. 4.) Gather your pay stubs and bank statements to verify that your income will support the mortgage and land lease.
If you’re curious as to why we decided on a manufactured home, check out my series here.