Modular Home Mortgage Process
Many potential modular homebuyers become overwhelmed when trying to figure out how to pay for their new home. In many ways, financing a modular home is very similar to financing a traditional stick-built home. In both cases, the buyer obtains a mortgage loan from a lending institution. The lender then pays off the seller, and the buyer begins a series of payments (usually over the course of 15 to 30 years) to the lender to pay off the loan. When purchasing a new modular home, however, the buyer must also cover the costs associated with the actual building of the home. This is also the case when the buyer is purchasing a stick-built home that will be constructed according to the buyer's specifications. So the distinction is not really between financing a modular home versus a stick-built home. The key difference is between financing a new construction home versus an existing home.
Paying for Construction for Your New Modular Home
The most common way to cover the costs of building a home is to obtain a construction loan. A construction loan tends to have a short duration, usually three to twelve months. With a construction loan, the buyer is able to make periodic payments to the modular home dealer and general contractor as they complete work on the home. This system of periodic payments protects both the buyer and the seller. Periodic payments reduce the buyer's potential losses from unforeseen events that result in the home not being completed. The dealer and general contractor benefit from periodic payments because they're not left holding the bag (in this case, a custom built home) at the end of the project if the buyer can't come through with the money. Also, with the buyer paying for work as it is completed rather than when the home is fully constructed, the dealer and general contractor are, in turn, able to cover the associated labor and materials costs.
Not all lenders offer construction loans so it is important for buyers to research potential lenders carefully. The actual steps involved in securing a loan for a new modular home are quite similar to the loan process when purchasing an existing home. Many online tools such as LendingTree.com allow buyers to shop around for home loans by entering basic information into contact forms. Lenders then use that information to generate initial loan offers. Lender offers will vary widely depending on the size of down payment the buyer is able to make, the loan term (usually 15 or 30 years) and whether the loan will have a fixed or variable interest rate. You can finance a modular home with as little as 3.5% down payment using a FHA home loan or save some money on reduced fees by putting down 20% for a standard construction loan to permanent mortgage.
Once the buyer narrows down the list of potential lenders based on their initial loan offers, the buyer may choose to ask one or more lenders to issue letters stating they are pre-qualified for a loan. These pre-qualification letters can signal to a dealer and general contractor that the buyer is interested in starting the construction process, but they do not guarantee that a loan will be made and they usually list a higher loan amount than the buyer will ultimately be able to secure.
Pre-approval for a loan is more meaningful than pre-qualification. The process for getting pre-approved requires the buyer to provide the lender with much more detailed information about their assets, liabilities and employment status. The lender uses this information and a comprehensive credit check to determine the how much money they are willing to loan to the buyer. Pre-approval for a specific loan amount allows the buyer to shop for existing homes or plan for new construction within set budget limits.
After pre-approval comes approval, perhaps the most critical step in the home financing process. Lending institutions have implemented more rigorous application reviews in recent years to limit their risks from defaults. In addition to reviewing the applicant's credit worthiness, lenders review the details of the home to be purchased. Lenders use the results of a home appraisal to determine if the home is worth the price being paid.
When a lending institution is reviewing a construction loan application, the initial determination of the home's value is based on submitted construction documents instead of an on-site inspection of an existing house. Lending institutions carefully review the construction documents and compare them to the home drawings/blueprints that are provided with the loan application. Any discrepancies between the drawings and the written documents must be resolved to the lender's satisfaction. Lenders make sure that the blueprints match the construction contracts because they want to make sure that the home they are financing is the house that will actually be built.
In addition to confirming that the drawings match the specifications written into the contract the buyer has with the dealer and general contractor, the lender reviews all of the prices listed in the construction documents to determine whether or not the costs are reasonable. In some cases, the lender may find that the prices charged are too high and are artificially inflating the price of the home. In other cases, the lender may find that the listed price is too low to cover the actual construction service costs. This review of line item costs provide some protection from skyrocketing costs when construction is underway.
Some modular home buyers obtain a construction loan separately from their mortgage on the completed structure, but this is not ideal. For most buyers, the best arrangement is to have the construction loan combined with the mortgage as one "construction-to-permanent" loan. The combination package allows the buyer to pay only one set of closing costs. In addition to saving the buyer money, construction-to-permanent loans tend to save time and eliminate the need to deal with multiple lenders.
With most construction-to-permanent loans, the loan converts to mortgage phase as soon as construction is completed. During the mortgage phase, buyers make payments toward the principal and the interest charged on the full loan amount; during the construction phase, the buyer generally pays interest only on the amount borrowed for construction.
Some construction-to-permanent loans charge the same interest rate during both phases of the loan. These fixed-rate loans can benefit the buyer in two ways. First, locking in an interest rate for the full loan term during the application protects the buyer should interest rates rise after the initial loan application. The other key benefit of a fixed-rate construction to permanent loan is that the buyer will know at closing what the monthly mortgage payment will be once the home is built.
Some buyers choose a loan with different interest rates for the construction phase and mortgage. Without a rate lock with the initial application, the mortgage interest rate is determined after construction is completed so buyers do not know at closing what the monthly mortgage payment will be. In some cases, these loans are more attractive to buyers because lenders may require a lower down payment or approve a higher total loan amount.