Whether youâre constructing or buying a new modular home, have you decided how youâre going to pay for it? Modular homes are typically more affordable than traditional, onsite-built homes, and the application and financing processes are similar.
Modular homes can be a great, affordable housing option to explore. Weâll outline your options for modular home financing below.
Modular homes have been growing in popularity in recent years as an affordable and customizable housing option. Unlike manufactured homes, modular homes are built to local building codes and are indistinguishable from traditionally built site-built homes once completed.
One key difference with modular construction is that the home is built offsite in a factory in modules or sections, which offers cost and time savings. The modules are then delivered to the home site and assembled. This unique construction process means that financing a modular home has some nuances compared to financing a site-built home.
Specifically, construction loans for modular homes have some unique considerations and modular-friendly lenders are key This comprehensive guide will walk through everything you need to know about getting a construction loan for your modular home project.
What is a Construction Loan?
A construction loan is a short-term loan used to finance the building of a new home. Construction loans allow borrowers to only pay interest on the money borrowed during the home construction process.
Construction loans have an initial “construction phase” where borrowers make interest-only payments, typically for 6-24 months depending on the size and timeline of the project. Once construction is complete, the construction loan transitions or converts into a traditional fully amortized mortgage loan and borrowers begin making principal and interest payments.
Construction loans allow borrowers to only pay interest on the money borrowed during the actual construction process. This helps manage cash flow during construction.
How Construction Loans Work for Modular Homes
The process of getting a construction loan for a modular home follows the same overall steps as a loan for a site-built home. However, there are some key differences in the draw process and timeline.
Here is an overview of the modular home construction loan process:
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Submit detailed plans and budget: As with any construction loan, you’ll need to submit detailed plans and a project budget for approval before funds will be issued. This is especially important for modular construction.
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Initial site prep work: For modular projects, initial funds are often used for site prep work like grading, utilities, excavation work, and foundation work. These tasks are required to be completed before the modular units can be set.
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Earlier and larger loan draws: With modular construction, a large portion of the total budget—the cost of the modules themselves—is needed upfront before sitework even begins. This means earlier and larger loan draws are required. Not all lenders will accommodate this.
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Interest-only payments: During the module assembly and finishing process, usually 4-8 months, the borrower continues making interest-only payments on the amount drawn.
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Construction completion: Once the home is complete, the loan converts to a traditional mortgage.
Because the timeline is accelerated with modular construction, finding a lender familiar with the modular process is key to ensuring your loan best accommodates the unique needs of modular construction.
Benefits of Construction Loans for Modular Homes
There are a few key advantages to using a construction loan for your modular home build:
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Only pay interest when you use funds: You only pay interest on funds as you draw them down during construction. This helps cash flow during the building process.
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Lock in your rate: You can lock in a low interest rate upfront for the permanent mortgage once construction is done. This avoids the risk of rates going up later on.
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One closing: With a construction-to-perm loan you only go through one closing process at the start rather than having to requalify and close again on a mortgage after construction.
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Customize along the way: Construction loans allow you to make some customizations or changes as you complete the finishing work. This flexibility is helpful for modular projects.
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Tax benefits: You can deduct mortgage interest paid during construction from your taxes. Always consult your tax advisor.
Overall, a construction loan can be a great, cost-effective option to finance a modular home. The key is finding a lender familiar and comfortable financing the unique modular construction process.
Modular Home Construction Loans vs. Personal Loans
Another option some consider for financing a modular home is using a personal loan. Personal loans can be easier to obtain, but there are some downsides to using them for home construction:
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Higher rates: Personal loans typically have higher interest rates, often 8-20% compared to 3-6% for construction loans. This results in significantly higher costs over the full repayment term.
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Shorter terms: Personal loans usually max out at 5-7 year repayment terms. A mortgage is 15-30 years, meaning much lower monthly payments. Shorter terms increase cash flow pressure.
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No interest write-off: With a mortgage, you can deduct mortgage interest from your taxes. You cannot deduct interest paid on personal loans.
While personal loans have some benefits like faster approvals and easier qualifications, the downsides make construction loans the better financing choice for most modular home builds.
Finding Modular-Friendly Construction Lenders
The unique timeline and process of modular construction means you need to find a lender that understands the modular build process and is able to structure your construction loan accordingly.
Here are some tips for finding the right lender:
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Ask your modular home builder for recommendations: Most experienced modular home builders have relationships with lenders familiar with modular projects. These lenders understand the unique needs of a modular build.
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Look for lenders that advertise modular financing options: Many lenders now tout having loan products tailored to factory-built homes. This is a good indicator they have experience with modular projects.
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Talk to local banks and credit unions: Smaller community banks and credit unions are often more flexible than national lenders when it comes to unique projects like modular construction.
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Consider online lenders: Many online lenders like Lightstream, SoFi, and LendingTree have started offering loans for factory-built homes. Online lenders can often process loans faster than traditional banks.
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Ask lenders about their experience: Don’t be afraid to interview lenders on their experience with modular construction and ability to accommodate the unique timeline and draws required. Find someone confident financing modular builds.
Taking the time to find an experienced, modular-friendly lender will make the financing process much smoother.
Requirements to Qualify for a Modular Home Construction Loan
While having experience with modular projects is key, lenders will also evaluate you as an individual borrower based on some universal loan qualification standards:
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Credit score: Most lenders require a minimum credit score between 620-640. The higher your score, the better your interest rate.
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Downpayment: A downpayment of at least 10-20% is typically required. Some lenders may go as low as 5-10% down.
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Debt-to-income ratio: Your total monthly debt payments, including the new mortgage, usually cannot exceed 43-50% of your gross monthly income.
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Loan-to-value ratio: The loan amount also cannot exceed a certain percentage of the completed home’s appraised value. Common requirements are 80-90% LTV.
Meeting these standards ensures you get approved and get the best rates. An experienced loan officer can guide you through the process.
Documents Needed to Apply for a Modular Home Construction Loan
Applying for financing requires collecting information on your project and personal finances. Having these ready will make the application process smoother:
Project information:
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Modular floor plans and specs
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Detail cost breakdown from modular home builder
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Completed site plans and foundation designs
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Budget with all project costs
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Construction timeline
Financial information:
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Income verification (pay stubs, W-2s, tax returns)
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Downpayment source documentation
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Bank statements
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Retirement account balances
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Credit report
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Existing home info if using sale proceeds
Being organized and ready with these documents helps speed up the loan review and approval.
Closing on Your Modular Home Construction Loan
Once approved, you’ll close on the construction loan and initial funds will be disbursed to start your modular project! Closing involves signing final loan documents and paying closing costs including appraisal fees, loan origination fees, title fees, and prepaid interest.
A loan officer will guide you through the closing process and timeline. Once closed, you can begin your modular home project!
Tips for Managing Your Modular Home Construction Loan
Here are some tips for effectively managing your construction loan throughout the building process:
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Closely track costs and maintain your budget
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Keep your loan officer updated on progress to facilitate draw requests
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Only request draws as needed to avoid paying unnecessary interest
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Have contingency funds ready for unforeseen costs
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Stay organized with all invoices, receipts, and draw documentation
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Thoroughly inspect work before approving draws to release
Proactively managing disbursements and paperwork ensures draws go smoothly and keeps your project on time and on budget.
Finding the Right Loan for Your Modular Home
The key is finding the right
Modular Homes Vs. Manufactured Homes
Modular homes are often confused with manufactured homes, but they arenât the same. Like modular homes, manufactured homes are constructed in a factory. But manufactured homes â also known as mobile homes or trailers â are built on a steel chassis and then transported to the home site. Manufactured homes are also built to conform to Department of Housing and Urban Development (HUD) standards.
Modular homes are built in parts, and theyâre assembled on a home site according to local building codes. They arenât mobile. And once assembled, theyâre secured to a permanent foundation.
Manufactured homes tend to depreciate in value if you donât own the land underneath. However, the value of modular homes will vary with the market, much like traditional homes.
Modular Home Financing Options
Before you start looking at potential homes to buy, you should take some time to think about how youâll finance your new home. The type of modular home financing you choose will depend on your finances and situation.
Here are a few options to consider (weâll discuss them in more detail below):
|
Modular Home Loans |
Minimum Credit Score |
Minimum Down Payment |
Maximum Debt-To-Income Ratio |
|---|---|---|---|
|
Conventional loan |
620 |
3% |
43% â 50% |
|
FHA loan |
500 or 580 |
3.5% or 10% |
43% â 57% |
|
VA loan |
580 |
0% |
Varies by lender |
|
USDA loan |
640 |
0% |
41% |
|
Construction loan |
620 |
20% |
45% |
|
Personal loan |
mid-600s |
0% |
36% â 50% |
|
Chattel mortgage |
575 |
5% |
Varies by lender |
A conventional loan is any home loan the federal government doesnât directly back. Conventional loans usually fall into two categories: conforming and nonconforming. A conforming loan is a mortgage that can be purchased by Fannie Mae or Freddie Mac and that doesnât exceed the Federal Housing Finance Agencyâs loan limits.
Conventional loans are a popular option to purchase modular homes. Youâre more likely to qualify for the best terms and interest rates with a good credit score. If you donât make a 20% down payment with a conventional loan however, youâll pay private mortgage insurance (PMI).
You can also purchase a modular home with an FHA loan. The Federal Housing Administration backs FHA loans, making it easier for borrowers with lower credit scores or smaller down payments to qualify.
FHA loans are available for borrowers with a 500 credit score from some lenders, but you must make a 10% down payment. If your credit score is 580 or higher, you can qualify for an FHA loan with a 3.5% down payment. Also, your debt-to-income ratio (DTI) canât exceed 43% â 57%. FHA loans have mortgage insurance premiums that are both upfront (due at closing) and monthly (usually last the life of the loan).
The Department of Veterans Affairs backs VA loans. The loans are available to qualified veterans, service members and their spouses. You can use a VA loan to buy a modular home and the land where you plan to construct the home.
VA loans donât have a down payment requirement, and you donât pay for PMI. However, there is a VA funding fee which ranges from 0.5% to 3.3% of your loan amount. Check with the VA to see if you meet the eligibility requirements.
The U.S. Department of Agriculture insures USDA loans. The house must be located in a rural or suburban area, constructed after January 1, 2006, and have at least 400 square feet of usable living space to qualify for a loan.
USDA loans are a great option for first-time home buyers and low- to moderate-income borrowers. They donât require a minimum down payment. Borrowers can finance the closing costs, and homeowners donât pay private mortgage insurance. However, borrowers must pay a USDA loan guarantee fee.
Rocket Mortgage® doesnât offer USDA loans at this time.
If you plan to build your modular home, you can apply for a construction loan. A construction loan is a short-term loan that covers the cost of building a house. Its funds are available while construction is happening.
Before a lender can approve a construction loan, you must submit detailed plans for the modular homeâs construction. And your lender will need to approve the company responsible for building the home.
Modular homes generally cost less than traditional homes, so you may be able to finance the purchase with a personal loan. Most personal loans are versatile financing options that can be used for almost any purpose, including buying a modular home. Most lenders offer personal loans up to $45,000. In rare cases, a lender may offer a personal loan for up to $100,000.
The benefit of getting a personal loan is that itâs unsecured, so you donât have to put down any collateral. If you default on the loan, the bank canât repossess your home or any other asset you may have used to secure the loan.
Applying for a personal loan is much easier than applying for a mortgage. But personal loans have higher interest rates and shorter repayment terms, so youâll pay more in interest over the life of the loan and have higher monthly payments. Plus, there is no way to deduct interest from a personal loan from income taxes.
You can use a chattel mortgage on a semi-permanent or mobile structure, like a manufactured house. And you can finance the purchase and construction of a permanent building, such as a modular home, with a chattel mortgage.
Chattel loans can be used for a variety of purposes. But they have shorter repayment terms, limited loan amounts and higher interest rates. Chattel mortgages are secured by personal property, and modular homes are considered personal property. If a borrower defaults on the loan, a lender can take possession of the home.
Manufactured Home: One-Time-Close Construction Loan
FAQ
Is a modular home on a foundation a good investment?
How does a chattel loan work?
Do modular homes have metal frames?
How much does it cost to build a modular home in Missouri?
What is a modular home loan?
Modular home loans are unique because modular homes are classified exactly the same as traditional stick-built homes. As a result, they qualify for traditional loan options, such as FHA, VA, or USDA loans. In many cases, a construction loan is required for the purchase of a new modular prefab home.
Do you need a construction loan for a Modular prefab home?
As a result, they qualify for traditional loan options, such as FHA, VA, or USDA loans. In many cases, a construction loan is required for the purchase of a new modular prefab home. A construction loan provides for construction dispersement draws to contractors and builders upon completion.
How does a modular construction loan work?
Modular construction loans for owned land only have to finance the home itself. This improves buyer eligibility and affordability. Costs covered typically include: With land already fully owned, total modular home loans balance shrinks. Monthly payments decrease.
How do you finance a modular home?
The way you finance a modular home depends on whether you’re building it or buying one that already exists. If you’re building a modular home, you’ll need a construction loan and maybe a land loan if the property hasn’t already been acquired. Construction loans are going to come with higher down payments.