Maybe you haven’t achieved the credit score needed for a conventional mortgage. Perhaps your income is a few years away from where it needs to be in order to buy a house along with the land. But you’re tired of renting. In that case, the purchase of a manufactured or modular home might be more in your budget, through the use of a chattel mortgage. It’s not without its risks, though, and you may want to carefully consider some other options before committing to a chattel loan.
There are quite a few mortgage options to consider when planning to purchase a new home. You have interest rates and loan terms to think about, for instance. You also have to examine whether your income and credit history will stand up to the scrutiny a mortgage application requires.
A chattel mortgage might be the right loan for you if you’re planning to purchase a manufactured home. But before you commit, be sure to talk to a mortgage officer about other options to finance your new property. There are government-backed options to consider that can be ideal for these types of dwellings. Or it’s possible you could qualify for a traditional mortgage. Your chances of getting a traditional mortgage loan are highest if the mobile home you’re interested in is permanently attached to a piece of land and you’re looking to buy the home and land together.
What is a chattel mortgage?
A chattel mortgage is a specific type of loan used exclusively for movable personal property. This can include boats, airplanes, heavy equipment for construction or farming, as well as manufactured or mobile homes. For the purpose of this article, we’ll mainly focus on chattel mortgages as used to buy moveable homes. With these types of loans, a borrower usually doesn’t own the land the property sits on. The movable property — or “chattel” — serves as the collateral for the loan.
Understanding chattel mortgages
Characteristics of these loans typically include higher interest rates and shorter terms, which can mean higher monthly payments. Additionally, chattel loans are secured by the property itself. Instead of just holding a lien against the property, as with a standard mortgage, a chattel-mortgage lender will hold title to the collateral property until it has been paid off. This way, if a borrower fails to make the payments, the lender can seize the property and sell it to pay off the debt.
Lower-income consumers seek chattel mortgages the most often. Priced out of traditional homes where they live, they may turn to manufactured homes as an affordable alternative, and to chattel loans as more accessible financing. People with lower incomes and other credit difficulties often find chattel mortgages the best path to owning their own home. In fact, based on the Consumer Financial Protection Bureau (CFPB)’s 2021 report, it appears that people in demographics with statistically lower incomes, such as members of certain minority groups, have found chattel mortgages a viable tool for achieving homeownership in spite of challenges.
Chattel vs. traditional mortgages
There are several differences between these two loans. Most important is that chattel loans are only used to buy property that can be moved and conventional loans are usually for houses built to stay on a piece of land, and with a permanent foundation.
Other differences include higher interest rates and shorter loan terms for chattel mortgages. For example, the most common home loan is the 30-year, fixed-rate mortgage, while chattels are usually 15-to-20 year loans — also with a fixed interest rate. You pay off the mortgage quicker, but your monthly payments could be high.
On the other hand, loan amounts for these mortgages are typically much lower than with regular home loan programs. This potentially makes the difference between deciding on a path to owning your own home versus continuing to rent.
What chattel loans are used for
Chattel loans are used exclusively for movable personal property, which includes construction and farming equipment, boats, airplanes, and homes that are not permanently affixed to the land. Let’s take a look at the kinds of homes this includes.
Manufactured homes, often still called mobile homes, were built after 1976. At that point, they were required by the Department of Housing and Urban Development (HUD) to adhere to certain safety standards. They are built offsite, on a metal chassis, and trailered to the land where they will be used for housing.
This is what manufactured homes were called before HUD instituted the safety requirements of 1976. It can be very hard, if not impossible, to acquire a mortgage to finance a home of this type.
In contrast to manufactured homes, although they look similar, modular homes must follow the same local building codes as houses built onsite. In addition, they usually have a more permanent foundation than manufactured homes because they aren’t normally moved. This type of “mobile home” is generally a better investment and your best chance of securing a conventional mortgage.
Benefits of a chattel mortgage
Consumer buyers of manufactured homes may find that a chattel loan is the only way they can afford to own a home.
The requirements to qualify for a chattel mortgage are less strict than those for getting a traditional mortgage. Because the size of the loan is smaller than most home loans and the property is used as collateral, lower-income buyers may find this type of mortgage within their reach. The requirements for credit scores are also more relaxed.
With commercial borrowers, it sometimes makes more sense to finance the purchase of an expensive piece of heavy equipment through a chattel loan rather than trying to come up with the cash. Also, that forklift, tractor, or backhoe can be put to work right away making money for its buyer.
Disadvantages of a chattel mortgage
While manufactured homes are generally less expensive than site-built homes, the same is not true for the associated financing.”
Consumer Financial Protection Bureau
Chattel loans typically carry higher interest rates, shorter loan terms, and fewer consumer protections than traditional mortgages. So it’s a riskier proposition for consumers. Still, it is sometimes the only available avenue to homeownership.
Let’s quickly recap the advantages and disadvantages of chattel mortgages so you can make the best possible decision.
- Makes homeownership possible for consumers who couldn’t buy homes otherwise.
- Less strict qualification requirements than traditional mortgages.
- Borrowers with lower credit scores may qualify.
- Finances homes that are more affordable than traditional homes.
- Can make sense for commercial borrowers financing heavy equipment (forklift, tractor, etc.) because the equipment can be used before it’s fully paid for and owned.
- Higher interest rates.
- Shorter loan terms.
- Fewer consumer protections.
- Riskier for consumers.
- Often the last resort rather than a preferred option.
Chattel mortgage lenders and your personal property
Keep in mind that with chattel mortgages your manufactured home is the collateral for the loan. In this, chattel mortgages and traditional mortgages are similar. In both, the lender’s interest is secured by the property being financed.
But there’s an important difference. As we pointed out above, unlike a traditional-mortgage lender with a lien, a chattel-mortgage lender holds legal title to your property until you’ve made the final payment. At that point, you own the house and it can’t be taken from you or resold by your lender. However, if you fall behind on payments or default on the loan, the lender can legally take it and resell it to pay your debt.
Know the laws in your state.As many of the laws governing traditional mortgages and foreclosure vary by state, so too might laws governing chattel mortgages and legal title to mortgaged personal property.
For instance, a 1965 Minnesota Law Review article suggests in footnote four that a chattel mortgage might involve either vendor-retained ownership of the financed property or a lien.
While we can hope that laws among the states are more uniform now than they were when this old paper was written, you should keep the possibility of state-level legal differences in mind. Learn all you can about the relevant laws in your state, and consult qualified professionals (attorneys, chattel loan officers) in your state to make sure you know what’s what where you are.
Tax implications of a chattel mortgage
Like traditional-mortgage borrowers, chattel-mortgage borrowers can deduct the interest on their taxes, though there are limits. You will not get the property tax deduction, however, unless you own the land your home resides on. If you do own the land, a less common scenario, that property tax should be deductible as well.
Where to get a chattel mortgage
Traditional as well as online lenders offer chattel loans. There are also lenders that specialize exclusively in these loans. Companies that sell manufactured homes may also be equipped to arrange financing for a buyer — much like a car dealership — but it’s always a good idea to shop around to find the best deal.
Alternatives to chattel mortgages
A chattel loan is not for everyone, and a possible alternative might be looking into a government-secured loan or even a personal loan.
Government loan programs
The Federal Housing Administration (FHA), for example, offers mortgages that have more relaxed credit score requirements, smaller down payments, lower interest rates, and cheaper mortgage insurance. If you qualify for this loan, because it’s government-guaranteed, you have more security than with a chattel mortgage.
It’s important to note that the FHA does not lend money. Instead, they insure the loan and work with mortgage companies to encourage lending to eligible buyers. Borrowers who often aren’t qualified for a conventional mortgage should look into this option, as the approval process is not as rigid.
If you qualify, it is better to finance your home with a mortgage since they have much lower interest rates and you can borrow larger amounts. Of course, those are only benefits if you qualify for a mortgage (chattel or traditional). In some cases, it can make a lot of sense to buy a manufactured home with a personal loan.
The main advantages of personal loans are these:
- They are not secured by your home, so lenders can’t foreclose on it.
- Most don’t include closing costs.
- You get the money in a matter of days, not weeks.
However, interest rates are higher, and you will need to meet the lender’s income and credit requirements. If you are struggling to get a mortgage, consider applying with several of the lenders below. There is no downside to finding out what rates you qualify for (don’t worry, it won’t hurt your credit score).
What is the difference between chattel mortgages and real estate mortgages?
The primary difference between the two is that a chattel mortgage is only for movable property, such as a manufactured home, whereas a traditional mortgage is usually for homes permanently attached to the land they sit on. In addition, chattel mortgages have higher interest rates and shorter loan terms.
Can you pay off a chattel mortgage early?
Yes, you can, but as with regular real estate mortgages, there may be penalties or fees associated with paying the loan off early. If you think you might, check with various lenders to see if this is an option before securing the loan. In some cases, your savings on interest payments over the life of the loan may be reason enough to simply pay those penalties and resolve that loan early. Remember, chattel mortgages typically come with higher interest rates than normal, costing you more in the long run.
What happens at the end of a chattel mortgage?
At the end of a chattel mortgage loan term, the buyer, having paid off the loan, owns the property free and clear. At this point, the owner is clear to sell the home if desired.
- If your financial resources rule out a traditional home and financing, a chattel mortgage could be your best path to becoming a homeowner.
- Consider if a government-backed loan is feasible for you.
- Interest rates are typically higher for chattel mortgages, and loan terms are shorter.
- If you don’t fulfill the terms of the loan, the lender can repossess your property and resell it.
- Your credit score and income may not fulfill the requirements for a conventional loan.
Are chattel mortgages a good idea?
Have you’ve decided to buy a manufactured or modular home. If so, a chattel mortgage could be a viable option for you. But don’t rule out a land-affixed home and more traditional financing prematurely. While it’s a bad idea to try tricking a traditional lender into giving you a loan you don’t qualify for, shopping around for a loan that suits you is a good idea.
One reason to shop around before committing to a chattel mortgage is that the best mortgage lenders offer appealing rates and a range of programs for borrowers with different incomes and credit scores. You can enhance your search by reviewing key facts about the mortgage industry.
View Article Sources
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