In a typical home-buying situation, a homebuyer goes to a bank or lender and applies for a home loan. The mortgage process includes a vetting process for eligibility. Once approved, the buyer is notified, purchases the home with the necessary paperwork, and finalizes the process in escrow.
After sharing the newly constructed house in the title as collateral, the homebuyer gradually repays the loan over time to settle the debt. The homebuyer then pays back the loan over time to satisfy the debt or the home is foreclosed on loan default.
This standard model has been used, applied, and followed for millions of homes across the country, so why shouldn’t it also work for modular homes? Given the divergence from the norm, the approval rate for modular homes tends to vary. Hence, a buyer anticipating this challenge will be better equipped to adapt as necessary.
Creative Housing Options are Becoming in Vogue
The escalating average price of a conventional home is spiraling out of control and persistently rising. When the bar is set at around $400,000 merely for the chance to bid on a respectable family home in a desirable neighborhood, alternatives should be able to compete and offer consumers additional choices.
This becomes evident when considering that modular homes can be constructed, placed, and completed for a customer at a cost significantly below $130,000 instead (see examples at https://koppercreek.com/). Yet, even this amount constitutes a substantial sum that few individuals have readily available in a savings account to purchase a new home outright. Consequently, nearly everyone must approach a lender for any home purchase.
The Collateral Game
Home loans function effectively because the substantial financing is backed by the property, an established home affixed to the land with a solid foundation.
However, a modular home is constructed in sections at a factory and then assembled on-site after being paid for and ordered. This timeline discrepancy between when the home is ready and when it becomes viable collateral poses a challenge that traditional lenders are less inclined to favor.
The first choice is to seek out a general mobile home loan. This specifically provides financing for a home that is expected to be relocated from place to place. So, the house itself versus the land property becomes the collateral.
Typically, these loans are much lower than traditional homes as a result. Housing and Urban Development loans are an alternative, but they have significant paperwork that not all lenders like to deal with.
Fannie Mae provides the MH Advantage program, which is designed specifically for mobile home financing. However, this program comes with eligibility criteria, including requirements like the installation of a driveway, a detached garage, and other elements that lend credibility to the home being more fixed in place rather than easily movable. Alternatively, Veteran Affairs loans can be used on traditional as well as manufactured homes and the land property they are placed on.
The landscape for financing modular homes remains diverse and somewhat unpredictable. Consequently, homebuyers should anticipate exploring different avenues. Despite their effectiveness, affordability, and ability to address the housing demand, modular homes still await alignment with the evolving real estate financing market in numerous aspects.