Do I Need a Construction Loan for My Modular Home?

Modular homes have been growing in popularity as an affordable and customizable housing option. Since they are manufactured offsite and assembled on your property, modular homes require a different financing process than buying an existing house. A key question that comes up is whether you need a construction loan to finance the modular home In this comprehensive guide, we’ll look at how modular home loans work, when a construction loan is required, what the process entails, and tips for securing the best financing

What is a Modular Home?

First, let’s quickly define what makes a modular home different than other home types:

• Modular homes are factory-built in sections called modules or boxes

• They are transported to the site and assembled on a permanent foundation

• Modulars must meet all local building codes and standards.

• They look and function just like traditionally stick-built homes.

Modular construction combines offsite efficiency with onsite versatility. This allows for fast project timelines, price predictability, custom designs, and quality finishes.

Typical Modular Home Loans

There are two main options for financing a modular home:

1. Construction Loan – This interim loan covers the home construction costs. It is then converted to a traditional mortgage once complete.

2. Traditional Mortgage – These standard home loans can be used if the modular home is already finished or part of a dealer’s inventory.

Many buyers are unsure if they need a construction loan or can just use a traditional mortgage. The answer depends on the specifics of your modular home purchase.

When a Construction Loan is Required

Here are the key situations where a construction loan is needed to finance a modular home:

• You are purchasing a custom modular directly from a factory and having it built to your specifications. The loan covers the manufacturing costs.

• You are working with a builder who will manage the modular fabrication and installation process. The construction loan pays the builder.

• You purchase a bare land lot and will have the modular installed on the new foundation. The loan funds land, site work, and home installation costs.

• You buy an unfinished or “shell” modular that requires completing the interior after installation. The loan covers finishing costs.

Essentially, if your modular requires any construction, customization, or completion after you purchase it, a construction loan is likely needed.

When Construction Financing is Not Necessary

There are scenarios where a traditional mortgage can finance a modular home without construction lending:

• You are purchasing a completed, ready-to-occupy modular from a dealer’s inventory.

• You buy the home and land together from one seller with the modular already installed.

• The modular requires no customization and will be finished before closing.

• You can pay cash upfront for the modular home without financing.

If the modular home is in livable condition at the time of purchase, a standard mortgage can typically be used.

How Construction Loans for Modular Homes Work

If you’ve determined that a construction loan is required, here is an overview of how the financing process works:

• Get pre-qualified – A lender will assess your finances and credit to estimate potential loan amount.

• Secure the land – Construction loans require owning the property where the modular will be placed.

• Finalize modular design – Complete design selections and contract with manufacturer.

• Appraise plans – The lender will estimate the future value of the home based on plans.

• Close on loan – Loan documents are signed to access funds as needed.

• Initial draws – Early disbursements to purchase land, permits, site work, foundation, etc.

• Ongoing draws – Releases of funds during major building phases like flooring, drywall, etc.

• Modular fabrication – Home sections are built at factory while draws pay the manufacturer.

• Assembly onsite – Modules delivered and installed on foundation.

• Final draw – Last funds release once home is completed.

• Loan conversion – Construction loan transitions to traditional mortgage.

While the process involves more steps compared to a typical home loan, the construction draws make it feasible to finance the modular build.

Tips for Securing a Modular Home Construction Loan

When applying for a construction loan, keep these tips in mind:

• Shop multiple lenders to compare loan costs, rates, and terms. Local banks are often good options.

• Get pre-qualified early so you know your budget for the home design.

• Lenders will require a down payment, often 10-20% of total costs.

• Good credit and debt-to-income ratios increase approval chances.

• Be ready to provide details on the modular manufacturer, floor plans, specs, costs, etc.

• An established builder with a fixed-price contract can simplify the underwriting process.

• Closing on the land before applying streamlines approval.

• Ask the lender what modular-specific documentation is required.

• Get draw schedules and loan conversion details in writing.

The Bottom Line

Construction loans allow buyers to finance and build a custom modular dream home on land they own. While the process involves extra steps compared to standard mortgages, builders and lenders are getting more accustomed to the unique process of financing factory-built homes. With good credit, a substantial down payment, and some research, securing a construction loan for your modular home is very feasible.