Chattel (n.) – An item of property other than real estate.
We’ve talked a little bit about chattel loans before, but today I wanted to go into more detail about what it means to buy a mobile home with a chattel loan. The pros and cons such as timeline, interest rates, down payment, and what happens in the event of foreclosure. Let’s jump right in.
Chattel Loan Timeline
A chattel loan is typically the first option we pursue with potential home buyers here at Braustin. One of the reasons being that a chattel loan has a much quicker processing time than other home loan options. Because a buyer is financing only the home and not both the home and property, the loan and all of its requirements can be completed much sooner with no need for a 2-3 week delay on appraisal and foundation construction.
For many home buyers, time is a huge consideration. Some are needing a home to coordinate with the end date of their rental lease while others are itching to get out of their parent’s home.
If a home buyer already has land available to them, whether they are renting, own it, or family is allowing them to use land rent-free, choosing a chattel loan will often allow buyers to complete financing and have their new home delivered as soon as 30 days. The timeline for a land and home package can take up to 3 months.
With a chattel loan, a buyer is in control of the loan process because they are attaining and submitting needed loan documents at their own pace. With other loan options, the bank, title company, construction companies, and appraisers take the lead in coordinating and scheduling the completion of the loan.
On the flip side, a chattel loan will tend to have higher interest rates than that of a government backed loan such as FHA or VA.
Because the government essentially guarantees banks they won’t be responsible if the home buyer defaults on their loan, banks will lend at a lower interest rate.
With a chattel loan, however, in the event of a foreclosure, the bank will not own the property the home sits on, only the home itself. Without an included property, the home will not be worth what the original loan was for and the bank will likely lose money. (This depreciation does not apply for a manufactured home resold on its original property.)
However, an FHA/VA loan comes with what is called PMI-private mortgage insurance. This insurance is to cover the remaining portion of the loan that the government does not back for a bank. Including the cost of the PMI into the monthly payment of a government loan, and it typically offsets the higher interest included with chattel.
Down Payment on a Chattel Loan
Another consideration in evaluating a chattel loan over that of a government loan is the down payment. The factors in determining down payment are similar to those that determine the interest rate. For chattel, it typically falls between 5% and 10%, and for FHA/VA between 3% and 5%.
But, if 10% on a $60,000 loan is compared to 5% on a $120,000 loan, a home buyer is producing $6,000 in both instances.
The upfront cost certainly isn’t the only aspect to consider, but it is important to note that though government loans can have lower interest rates and down payments, the total amount borrowed is higher and therefore the monthly costs tend to equal out.
In the Event of Foreclosure
I mentioned this briefly above, but in the event of foreclosure on a mobile home purchased through a chattel loan, the bank only owns the home itself and not the property it sits on. Because of this, if the home is repossessed, a home owner would not lose both land and home.
Still owning the property would allow a home owner to utilize their land as an asset to aid in the recovery of their home loss.
In a land and home situation, required when purchasing with a government loan, the homeowner would lose both their land and home simultaneously, resulting in a longer road to recovery from an already unfortunate circumstance.
Your Loan Depends on Your Circumstances
Although chattel is not the only loan option available to finance a mobile home, it is considered to be the least painful and expedient option for a homeowner to get into their new home.
There are circumstances where someone would prefer a government loan, especially where land has not been obtained and many improvements need to be done. In this case, a government loan would significantly lift upfront financial burden from a home buyer and make path to becoming a home owner much more doable—just with more time and few more hoops to jump through on the way.
In the end, each customer is an individual with specific needs and circumstances. Luckily, there is a loan option for nearly everyone.