Are you interested in buying a mobile home? You’re certainly not alone. There are more than 8 million mobile homes in the United States (source). Mobile homes are popular because they are much less expensive than conventional houses. The average cost of a mobile home in 2015 was $68,000, according to the U.S. Census Bureau. The average cost of a conventional single-family home is $360,000.
So mobile homes make sense economically. But if you’re in the market for a mobile home, which is the best financing method?
Manufactured homes, mobile homes, and modular homes
If you’re new to mobile homes, you need to start by learning the jargon that goes with them. Knowing the terms will help you understanding the financing methods available. It also allows you to communicate better with the lenders funding the purchase.
Newer mobile homes are called manufactured homes. Manufactured homes are built in factories and placed on a permanent chassis. Because of the chassis, they can be moved easily. It is the chassis that defines the manufactured home as “mobile.”
The Department of Housing and Urban Development (HUD) implemented construction standards for manufactured/mobile homes in 1976.
Homes with a permanent chassis built before then can still be called “mobile homes,” but they may not have been built to the 1976 standards.
A chief result of the 1976 standards was a HUD document known as the Certification Label and the Data Plate. These certificates are red and must be visible inside the home. Removing them is against the law.
A HUD Label is particularly important when you buy, sell, finance, and insure a manufactured house. If you don’t have a HUD Label, it will be very difficult to obtain financing of any sort.
Don’t confuse manufactured with modular or prefab homes. Prefab homes are also built in a factory. However, they can be built on a permanent chassis or “off-frame,” with a removable chassis. These are generally towed to private land and assembled there.
Mobile homes are frequently located on leased land (mobile home parks).
Chart Source – Heritage.org
Financing a mobile home vs a traditional home mortgage
The most important consideration when financing a mobile home is whether you own the land where it is (or will be) placed.
If you own the land and need financing for a manufactured home you may be able to get a conventional mortgage. However, if you do not own the real estate itself, many conventional lenders will not approve you for a mortgage.
If you don’t own land, consider applying for a U.S. Federal Housing Authority (FHA) loan, because it is not a requirement for an FHA loan. If you qualify, consider getting a home loan through the U.S. Department of Veterans Affairs (VA). They provide loans both for manufactured houses and lots.
The FHA is not a direct lender. So, you’ll need to search for a lender that is approved to make FHA loans. The FHA insures loans, which makes them more attractive to lenders because they bear less risk in case of a loan default.
The borrowing requirements for FHA loans are easier to qualify for than most conventional mortgages. Down payments can be much smaller than with conventional loans: as low as 3.5% the purchase price. Typically, interest rates are also lower with an FHA-guaranteed loan.
If you have poor credit (credit score of 550 or less), you may still be able to get an FHA loan. You can qualify for an FHA loan even if you have had a bankruptcy in the past. On the other hand, many conventional lenders will not give you a mortgage if you have poor or average credit.
One drawback to FHA loans is that they are for a shorter term than a conventional mortgage. Mortgages are for 30 years; most FHA loans for mobile homes have 20-year terms.
FHA loan also have loan amount limits to consider. As of 2017, the limit for a manufactured home is $69,678. If you only want to buy the lot, the limit is $23.226. The limit is $92,904 for both the manufactured home and the property.(Source)
Another limitation to consider is that FHA loans are only an option if the mobile home is your main residence. Like conventional mortgage lenders, FHA lenders will look at your employment, salary, credit history, and credit score to determine eligibility, the loan’s interest rates, and other terms.
As with FHA loans, the VA guarantees loans by insuring them against default. The VA itself doesn’t make the loans. You need to find a lending institution that issues VA loans.
Members of the military, veterans, and their spouses are all eligible for VA loans. The VA guarantees loans for both manufactured houses and lots.
To qualify for a VA loan, you will need a certificate of eligibility (COE). The certificate proves to lenders that you are eligible for a VA-backed loan. Check here for COE requirements.
As with FHA loans, the manufactured home needs to be your primary residence. To be approved for a VA loan, you also need to provide your work history, your current employment, salary, and your credit history.
If you do not qualify for a conventional loan or an FHA or VA loan, and you do not own the property where your manufactured home will be located, consider getting a chattel loan. A chattel loan is a loan for a mobile home that is not attached to the property through a deed or title.
If you plan to rent or lease a plot, remember to factor the cost when determining how much you can afford to spend on a mobile home. There are some issues to consider when getting a chattel loan. The interest rates are higher than mortgages. Mortgages as of January 2017, carry roughly a 4% interest rate. Chattel mortgages are around 2% higher, at 6% for people whose credit scores are good. If your credit score is average or poor, the interest rate for chattel mortgages might be significantly higher, in the 10% range. (
There are some issues to consider when getting a chattel loan. The interest rates are higher than mortgages. Mortgages as of January 2017, carry roughly a 4% interest rate. Chattel mortgages are around 2% higher, at 6% for people whose credit scores are good. If your credit score is average or poor, the interest rate for chattel mortgages might be significantly higher, in the 10% range. (Source)
As a point of reference, most lenders consider a credit score of 700 and higher as good; a score of 650-699 as average, and 600-649 as poor. (Source)
The terms of chattel loans are usually shorter than conventional, FHA, or VA loans. They may only be 10 to 15 years. As a result, the monthly payments will be higher. Because of these issues, it may be a good idea to consider buying the land where you plan to place your manufactured home.
If you know the area where you want to live, buying the land would make you eligible for a mortgage or FHA loan. If you are eligible for a VA loan, you can finance both the land and a manufactured home.
A loan to buy land is called — wait for it — a land loan. Most major banks shy away from land loans. Local banks or credit unions are your best bet when looking for a lender. Read this article to learn more about how to finance land.
Lenders will assess your salary, work history, and credit score, just as they would with a mortgage or chattel loan. Factor in payments on a land loan along with payments on a manufactured home when calculating how much you can afford.
Special considerations: mobile tiny homes
Tiny homes are an increasingly popular option for housing, especially among people with lower incomes. Those who are just starting out and retirees are embracing tiny homes because they are less expensive than conventional homes.
The cost of a tiny home can be as low as $20,000, depending on size. Tiny homes range from 160 square feet to 600 square feet, and they can be mobile or built on a foundation. Some mobile home parks allow tiny homes with wheels or the capability for wheels. Others are not zoned for houses of that size. If they are built on a foundation, they are essentially the same as conventional homes, just smaller.
For a mobile tiny home, financing is still in its infancy. Most conventional mortgage lenders do not want to lend such a small amount. FHA or VA loans may be a possibility if you qualify.
A personal loan is one option to consider for a tiny home. Because the costs can be much lower than for a conventional home, a personal loan may be enough to cover the costs.
Zoning and building codes is a serious issue with all tiny homes, whether you plan to move from spot to spot or stay in one place. Many locales are not zoned for tiny houses, and the square footage may violate codes. Check all regulations and rules thoroughly in the area where you plan to live before financing a tiny home or a mobile home.
It’s a good idea to get preapproved for a loan before purchasing any home. Mobile homes are not an exception. That way, when you find the mobile home of your dreams, you can purchase it quickly. A preapproved loan can also give you the leverage you need to negotiate a better price.