There are a few different loan options when buying a mobile home. The choice can seem unclear at first when you don’t know the lingo, but after learning what each loan option entails, your finances will almost make the decision for you.
We’ve talked about interest rates and credit scores before, so I won’t go into great detail about that here today. What I really want to get into is what it means to buy chattel, land/home, or the very mysterious land-in-lieu.
One of the most common options used when purchasing a mobile home is what is referred to as chattel. This means you are obtaining a loan for the home only. The land you are placing the home on will be purchased separately, or, if you are placing in a mobile home community, not purchased at all.
There are quite a few benefits from obtaining a chattel loan. First, the loan will be for just the cost of the home, which means a smaller loan. Second, the land is free and clear if your loan is defaulted and the home is repossessed—certainly not a pleasant thought, but a practical one. Third, the home is taxed separately from the land, meaning smaller monthly payments on what is called escrow (the part of your payment made toward tax and insurance).
Buying chattel also means processing the home purchase and installation more quickly than some of the loans we will discuss below.
Of course, it wouldn’t be right to tell you all the benefits without giving you some of the negative sides as well.
With a chattel loan, because only the home is being purchased, it is a loan the bank considers “high risk.” This means that banks will typically require at least 5%-10% down payment and charge a higher interest rate—between 6.99% and 12.99% dependent of course on credit score and total down payment.
Remember, down payment reflects how much skin you have in the game. Banks take many precautions to protect themselves in the event you can no longer follow through on your loan commitments, interest rates are one of them.
Land/Home FHA and VA Loans
FHA and VA loans are loans issued by banks with 80% of the loan being backed by the federal government. The other 20% however is backed by what is called Private Mortgage Insurance, or PMI.
These government backed loan options typically have lower down payment requirements and lower interest rates, between 5.25% and 6.25%. So, it almost seems like a no brainer, right?
First, the PMI I mentioned, along with the closing costs rolled into the total loan, tend to jack your monthly payment right up there with the interest rate of a conventional (chattel) loan. Used to, PMI was only applied in the first 5 years of a government backed loan, now it is required for the full term.
When purchasing a mobile home with one of these loan options, there are certain requirements for the home installation which will require spending more than you may have planned.
First, your land is combined with the mobile home purchase and then will need to be placed on a concrete foundation. The cost can range in the $6,000-$10,000 ballpark. The home will also need to be retrofitted to the foundation, where anchors are installed on each corner to tie it into the concrete, as well as certain deck and inspection requirements.
Because you are receiving a loan for the home and land, the bank has access to both in the event of a foreclosure. Also, the total loan amount is what your home insurance will need to cover. This means instead of insuring a $60,000 home, you are insuring a $150,000+ property.
So Which Loan Do I Choose?
This is coming off as very negative, that isn’t my intention. What I want is for home buyers to think through their options and very carefully weigh the pros and cons, making an educated decision for the future of their financial stability.
If you have property already and aren’t in need of twenty or thirty thousand dollars worth of improvements, it would most likely be in your best interest to consider the conventional, chattel loan option. This protects your property from foreclosure, saves the added cost of FHA/VA improvement requirements, and reduces the total loan amount considerably.
If you do not have property, or the property is in need of utilities, septic, and other necessary improvements, rolling your home and land loan into one with the lower upfront costs of a government backed loan might be just the route you need in order to get you and your family into an affordable setup.
Land-in-Lieu Loan Options
Land-in-Lieu, first of all is fun to say, and second of all, means offering land up as a down payment. It’s land in lieu of a down payment, otherwise known as collateral.
This option can be used in both the conventional method as well as FHA. Using land as collateral in a conventional loan does have the consequence of no longer having your property free and clear from the home purchase should a foreclosure occur. Just as you would not receive your 10% back from the bank, neither would they give your land back.
Of course, you don’t get to choose how much your land is worth as a down payment, it will need to be appraised and a down payment value determined from there.
Big Investments Require Big Choices
In the end, there will be good aspects and bad aspects. Your home buying decisions will come down to what suits your family now and what long term affects you can accept later. No loan is perfect, because, the fact is, it’s a loan. You are paying not only the price of what you are buying, but also the price of the loan.
There really is no getting around the aspect that unless you have saved up tens of thousands in cash, you will need a loan to help you achieve your homeownership dreams now, without living with your parents or renting for thirty years.
How fortunate we are to have these loan options to invest in something that can appreciate, and provide security in a market with ever increasing rent prices and decreasing rent choices.