Modular Home Construction Financing Explained
Building a new modular home is a very exciting time that will create a great place for memorable family occasions throughout the years. For most people, the key to making your new modular home a reality is establishing financing to enable the building and ownership of your new home. There are seven main parts of financing a new modular home (not including your search to find a mortgage lender). These seven parts are the same if regardless if you use a FHA construction loan or a standard construction to permanent loan. These parts are very similar to financing the construction of a stick-built home with a few small variances. The information below should make the financing aspect less stressful so you can concentrate on the more important things in life.
Part 1 - Pre-Qualify Estimate
A modular home mortgage pre-qualification will enable you to know just how much buying power you have and what budget you should be working with. This is generally a short and quick process to give you an estimate. This does not guarantee a mortgage or a specific dollar amount. The bank or lending institution will ask for your financial history but will not verify it. As long as you provide honest answers, the pre-qualified mortgage estimate should be very accurate.
Part 2 - Applying
Once you have decided on a specific building location and a specific modular home plan, you will be ready to start the formal application process. The formal process will require several items like a check to cover the fees (for application review, credit check and appraisal); proposed contract for the modular home plan you wish to purchase; recent bank statements; W-2 filings; most recent pay stubs from your current employer(s); and recent loan statements if you already have other loans (car, boat, another home). The bank may need several days to process your application and verify all the information you have provided. If you use a bank that is familiar with modular homes, it can expedite this process.
Part 3 - Mortgage Approval
If the bank has been able to satisfactorily answer their concerns about your mortgage, they will provide you with a formal commitment letter. This will state the specific amount of the loan that the bank will provide to you. This letter may include restrictions and conditions that you will need to honor before the loan can be closed and your home can start to be built. When you receive this letter, you will generally be asked to provide specific blueprints or plans to detail the modular home as well as a contract with your general contractor to state the labor costs. In addition, you will need to furnish a copy of the deed for your building lot.
Part 4 - Disbursement Schedule
Now that your mortgage has been approved, you will need to establish a disbursement schedule to detail when and how much money will go to each vendor. These payments or draws will cover each milestone like the clearing of the land, building of the foundation, delivery of the modules to the build site, finishing the exterior and interior of the house, and building of additional garages or decks. As each draw is needed, you will need to have an inspection to prove the work was completed satisfactorily and verification that no vendor has placed a lien on the home. If everything is as it should be, the bank will issue you your check to pay your vendor.
Part 5 - Mortgage Closing
Once a disbursement schedule has been agreed to and all restrictions and conditions made by the bank have been honored, your loan will be "closed" or settled. This is when you and the bank will sign the final loan documents, and you will pay any closing costs, which range from 4% to 7% to cover the lawyer fees, title fees and other costs. Even though these are closing costs, they are not the last costs associated with the loan. You will have to pay more fees when your loan converts from a construction loan to a permanent mortgage. This is also a good time to ensure the local government has granted your building permit; otherwise, you have no need of a mortgage.
Part 6 - Building the House
Now that you and the bank have formally agreed to all the details and signed the formal loan documents, building of your modular home can commence. As detailed in the disbursement schedule, the payments will be made as each building milestone is reached and verified. This part is also the first time that you start making scheduled payments to the bank to cover the mortgage. You will only be making payments based on how much money has been disbursed, which means your payments will increase quickly. Since you are dealing with modular construction, it is possible to have the home built and moved into within 1 to 2 months to avoid or minimize these construction loan payments. The largest disbursement is usually when the modules arrive. The modular home manufacturer generally will ship all modules on the same day and require full payment upon delivery of the modules to the building site.
Part 7 - Transferring from Construction Loan to Permanent Mortgage
After the construction is completed, your loan will change to a permanent mortgage. This part involves having your home appraised to ensure 1) the home value is correct; 2) all work has been completed; and 3) no liens have been placed by a vendor. This also involves paying the transfer fees from construction loan to permanent mortgage.
Now you have a great new modular home for your family. You also have a lifetime of mortgage payments ahead of you, but isn't the smile of your children playing in their new bedrooms and your new tax deduction of mortgage interest worth it? Good luck!