How to Get a Construction Loan to Build Your Dream Modular Home

So you’ve decided that a modular home is the perfect option for your new house. Modular homes offer flexibility in design, quick construction timelines, and cost-effective pricing compared to traditional stick-built homes. But how do you finance the construction of your new modular home?

Getting a construction loan is the most common and best way to pay for building a modular home. Construction loans allow you to finance the entire building process from start to finish.

In this comprehensive guide we’ll walk through everything you need to know about getting a construction loan for your modular home. including

• What is a construction loan and how does it work?
• Construction loan requirements
• Construction loan rates and fees
• The modular home construction loan process
• Finding the best construction loan lender
• Other financing options for modular homes
• FAQs about construction loans for modular homes

Let’s get started!

What Is a Construction Loan and How Does It Work?

A construction loan is a short-term loan used to finance the building of a new home. With a construction loan, the bank disburses payment to your modular home builder in stages as certain milestones are reached during the construction process.

Here’s how a modular home construction loan typically works:

• You purchase the land you want to build on or use land you already own
• You get approved for a construction loan based on the projected costs to build your modular home
• The bank sets up a payment schedule, disbursing funds to your modular builder as agreed upon stages of construction are completed
• You will make interest-only payments on the loan during the construction period
• Once construction is finished, the loan converts into a traditional mortgage with principal and interest payments amortized over 15 or 30 years

The term of a construction loan is usually around 6-12 months, depending on the length of time needed to complete construction.

Construction loans require a down payment just like a conventional mortgage, typically 10-20% of the total costs. The equity you have in the land can often count towards your down payment amount.

Construction Loan Requirements

Getting approved for a construction loan is similar to getting a traditional mortgage, but with some additional requirements specific to financing new construction.

Here are the typical requirements for a construction loan:

• Good credit score and history
• Sufficient income and assets
• Low debt-to-income ratio
• Down payment funds equivalent to 10-20% of total costs
• Approved house plans and specifications
• Itemized cost breakdown from modular home builder
• Building permits and contractor licenses
• Budget including contingency reserve
• Title to land or sales agreement if purchasing

Meeting these requirements demonstrates to the lender that you are financially qualified to take out the loan and that your modular homebuilding project is feasible.

Providing detailed plans, budgets, permits, and contracts upfront is especially important for construction loans financing modular homes. Not all lenders have experience with modular construction, so you need to provide ample documentation about the process.

Construction Loan Rates and Fees

Construction loan rates are generally higher than rates for traditional mortgages. You can expect to pay 0.25% to 2% higher in interest rates compared to conforming mortgage rates.

However, you only pay interest on the loan amounts withdrawn during the construction period. And once the home is completed, you can refinance into a traditional mortgage at lower long-term fixed rates.

Fees charged on construction loans include:

• Origination fee – 1-2% of the loan amount
• Application fee – $50 to a few hundred dollars
• Inspection fees – $200-$500
• Draw fees – $25-$100 per draw payment
• Change order fees – for modifications during construction
• Credit report fee
• Appraisal fee
• Legal fees

These fees are usually rolled into the loan amount, rather than paid upfront. Closing costs when you refinance into your permanent mortgage will be an additional 1-5% of the loan amount.

When comparing construction loan options, look closely at the rates, term lengths, and fee structures. Even small differences can add up over the course of the loan.

The Modular Home Construction Loan Process

Now let’s walk through the typical steps in the construction loan process:

1. Find Land to Build On

First you’ll need to purchase land or use land you already own as the site for your modular home.

If buying land, make sure it is approved for residential building and meets any requirements your manufacturer has about minimum lot size.

Once you have the land secured, you can get a professional appraisal done to determine the property’s value. This will be used by the lender to evaluate your equity position.

2. Get Pre-Approved

Next, you’ll want to talk with lenders and get pre-approved for a construction loan amount.

Pre-approval takes into account your credit, income, debts, assets, and down payment amount. It provides an estimate of the loan amount, rates, and fees you can qualify for.

Having a pre-approval letter will also make your modular home builder and land seller (if still purchasing) confident you can secure financing.

3. Finalize House Plans and Budget

Now you can start working on your modular home design with more certainty about your loan amount.

Finalize the house plans, choose interior finishes, and get a detailed budget from your manufacturer itemizing all costs.

Lenders will want to review the full plans and specs during the official loan application process.

4. Apply for Construction Loan

With your final house plans, budget, land, and pre-approval in place, it’s time to formally apply for the construction loan. This involves providing:

• Completed loan application and paperwork
• Credit report
• Verified income, assets, debts, and credit history
• Down payment funds
• Land title or purchase agreement
• Full modular home plans and specifications
• Itemized budget from manufacturer
• Building permits and licenses
• Other required documents from lender

It can take 1-2 months to get fully approved and close on the construction loan.

5. Builder Gets Paid as Work is Completed

Once your loan closes, construction can begin!

The lender will set up a draw schedule detailing the payment amounts the modular builder will receive at different milestones:

• Initial payment at contract signing
• Delivery of modules to site
• Installation of foundation
• Completion of interior module setup
• Final phase when home is finished

The lender may require inspections at each phase before releasing payments. Your mortgage payments also begin, but during construction you pay interest-only.

6. Construction Loan Converts to Mortgage

As soon as your modular home is finished, an appraiser will do a final inspection and determine the home’s as-completed value. This becomes the amount for your permanent mortgage.

Your construction loan seamlessly converts to a traditional 15 or 30-year mortgage you pay back monthly just like any home loan.

Now you can move into your beautiful new modular dream home!

Finding the Best Construction Loan Lender

The lender you choose for your modular home construction loan is key. You want an experienced company that understands the modular building process.

Here are some tips for picking the best construction loan lender:

• Look for lenders familiar with financing modular construction – they will better understand the process and have fewer doubts.

• Ask your modular home manufacturer for recommendations – they likely have relationships with lenders who regularly handle projects like yours.

• Compare multiple lenders – look at interest rates, term lengths, fees, and reviews to find the best loan programs.

• Consider small and community banks – they may be more flexible than large national lenders and can offer personalized service.

• Read reviews and ask for referrals – look for lenders with proven experience financing modular construction.

• Check credentials and licensing – make sure the lender is properly certified in your state.

Taking the time to find the right lender will make financing your modular home much smoother.

Other Financing Options for Modular Homes

Construction loans are the most common way to finance building a modular home, but not the only option. Here are a few other ways people pay for modular home construction:

Personal Loan – Banks and online lenders offer personal loans up to $100k that can help cover a modular home’s down payment or supplement additional costs.

Home Equity Loan – If you have sufficient equity in your current home, a home equity loan can provide funds to build a modular home as your new primary residence.

Cash-Out Refinance – Cashing out a portion of your current home’s value through a refinance is another way to tap equity for modular construction.

Retirement Funds – In some cases, you may be able to use Roth IRA or 401k funds to finance a modular home you plan to live in.

USDA or VA Loan – Government-backed mortgage programs can provide 100% financing for modular homes in certain rural or underserved areas.

Manufacturer Financing – Some modular builders offer