A manufactured home can be classified in two ways: as personal property or as real property. The way a manufactured home is classified may seem unimportant or irrelevant at first glance. However, it often determines the financing options a buyer can access in order to purchase such a home.
In general, a manufactured home that is permanently affixed to a HUD-approved foundation can be purchased with a conventional mortgage, while a home titled as personal property can only be financed with a chattel loan.
On average, about 65 percent of the manufactured home buyers who choose to affix their homes to land they already own or are still paying for—and therefore could purchase them with the help of a conventional mortgage—prefer to take out a chattel mortgage.
Considering the confusion surrounding the topic of manufactured home financing and the increasingly widespread use of chattel mortgages, there is no better time than now to talk about this financing option.
What is a Chattel Mortgage?
A chattel mortgage is a form of financing that can be used to purchase or refinance a manufactured home that’s not permanently attached to land. For example, chattel mortgages can be used to finance the purchase of manufactured homes that are placed in land-lease communities, on individual rental sites, on family land, or on land that home buyers own outright or are still paying for.
How a Chattel Mortgage Works in Practice
In a chattel mortgage, the lender holds a lien against the manufactured home that is used as collateral for the loan. The lien protects the lender’s interest in the property by providing some security in the case that the borrower fails to fulfill contract provisions. In the event of a default in payments, for instance, the lender can initiate repossession and sell the home to pay off the debt. Once the borrower repays the loan, the lender begins the process of removing the lien.
Benefits of Chattel Mortgages
A chattel mortgage can deliver a series of benefits, such as:
- The interest charged on the loan is tax deductible, with some limitations;
- Monthly mortgage payments can be structured similar to conventional mortgage payments;
- Because chattel mortgages are secured loans, their interest rates are generally lower compared to interest rates associated with unsecured loans.
Before applying for a loan, a prospective home buyer should carefully review the eligibility requirements of the financing options available for these types of homes, and ponder their pros and cons.
After deciding which financing alternative is best for his or her particular financial situation, the buyer should get approved for the loan with a quality loan company before starting the house hunting process.