Mobile home buyers in California have two financing options: chattel mortgage and traditional loan. These funding sources come with pros and cons that you must weigh in before making your decision.
(Note: Mobile homes are also called manufactured homes. This article uses these two terms interchangeably.)
A chattel loan applies to movable properties, such as a mobile home and heavy equipment, e.g., forklifts and tractors. Compared to a regular mortgage, it comes with higher interest rates and shorter payment terms.
Another difference is that the chattel mortgage lender owns your property until it is paid off. In contrast, your property serves as a lien in a regular loan.
- Borrowers with lower credit scores may qualify for chattel loans. On average, 575+ scores are enough to make you eligible for this type of financing.
- For some buyers of manufactured housing, chattel mortgages might be their only option.
- They usually come with a low processing fee.
- Chattel loans come with higher interest rates than traditional mortgage loans. Their rates vary significantly, between 5.99% and 12.99%, because of several factors such as the borrower’s income, credit history, and debt-to-income ratio.
- They come with higher APRs than standard financing options.
- The monthly payments are higher than a regular mortgage because of the shorter terms.
- The typical terms on chattel loans are 15-20 years, significantly shorter than a regular mortgage in which the payment term can be as long as 30 years.
- They come with lower maximum loan amounts.
Defaulting on Chattel Loans
Because the lender owns your property until it is paid off completely, the repossession process only takes 30-81 days in the event of a chattel loan default. This is not the case with conventional mortgages, particularly those government-backed loans, wherein homeowners enjoy certain protection before repossession occurs.
If you have a good credit score and you own the land where your mobile home will be permanently installed, a traditional mortgage is your best financing option because it comes with lower interest rates and APRs, better protection for homeowners in the event of default, and longer payment terms.
Traditional mortgages are either insured by the Federal Housing Administration (Fannie Mae and Freddie Mac) or private mortgage insurers. In most cases, government-backed loans come with lower interest rates and APRs.
However, it is easier to qualify for loans insured by private mortgage companies because of their less stringent credit score requirements.
- Both government- and private-insured conventional loans have lower interest rates than chattel loans. In addition, they have lower APRs, which typically range between 2.88% and 5.75%.
- Traditional loans have longer terms, up to 30 years; hence, they have lower monthly payments.
- They have a lower down payment, sometimes as low as 3% of the property’s total price.
- They come with a high maximum loanable amount, even reaching $750K in some regions.
- They offer better protection for homeowners in the event of default.
- They have stricter credit score requirements. To qualify for a traditional mortgage, your score should be at least 620.
- Their requirements are stricter, making it hard or even impossible for some homebuyers to qualify. This is particularly true for people with high debt-to-income ratios and poor credit history.
Defaulting on Traditional Mortgages
These loans offer more protection to homebuyers who are struggling with their payments. In fact, repossession is a lengthy, arduous process that involves judicial court proceedings that most lenders would rather agree to loan modifications.
The repossession process in conventional mortgages can take anywhere from one year to four years, significantly shorter than in chattel loans’.
Step-by-Step Guide in Mobile Home Financing:
Follow the guidelines below if you’re serious about securing a mobile home loan in California.
- Check your credit scores.
Your credit score will largely influence your qualification for loans, the interest rates and APRs, and the maximum loanable amount. To check your credit history, order online from annualcreditreport.com or call 1-877-322-8228.
Once you get your credit report, check for any mistake, which you can dispute with these three nationwide credit bureaus: Equifax, TransUnion, and Experian.
- Decide what you want from your home.
The location, size of the home, and its architectural elements will determine the loanable amounts, interest rates, and even your eligibility for loans. For example, some lenders don’t finance older manufactured homes and those that cost more than $100K.
Each lender has its specific requirements based on the value and age of mobile homes.
- Decide if you’re also buying the land.
In general, it is easier to qualify for chattel and mortgage loans when the mobile has its wheels removed because lenders see it as a sign of stability of the asset they are going to finance.
In contrast, renting a plot for your manufactured home could mean fewer financing options than if you own or plan to purchase the land where it will sit on.
- Look into different financing options.
Whether you’re going for a chattel loan or a traditional mortgage, make sure that you compare the interest rates, APRs, closing costs, maximum loanable amounts, and payment terms from multiple lenders.
Be honest and realistic when it comes to the financial obligations that come with all funding options.
- Submit your loan applications.
Before submitting your applications, make sure that you have already researched what constitutes a good offer in the current market.
Once you understand the current lending climate, choose 2-3 lenders and send them a complete application. Compare their offers and pay close attention to their interest rates, APRs, closing fees, and payment terms.
Applying to multiple lenders allows you to compare rates and fees, but sending too many might negatively impact your credit report due to numerous credit inquiries.