Unlike the traditional homes that are comparatively easier to finance, prefab and modular homes might take a hard toll when it comes to getting a mortgage. Due to the unusual nature of these prefab homes, some lenders don’t consider the aspects of non-standard construction properties. However, on the contrary, prefab, and modular homes hold an upper hand in financing over the mobile and manufactured homes that are moved around and might not have a permanent concrete foundation. And due to this, prefabs hold greater value and property appreciation because of which some companies tend to approve a mortgage for the homeowners.
First and foremost, you must know that your bank will issue a construction to permanent loan that is apparently a two-stage process. Initially, you are only expected to pay the ‘interest’ until the prefab home is complete and receives its final appraisal. Once it is complete, you are bound to make regular loan payments against the total loan amount. The other way around is the self-build mortgage where you build your own prefab home, and the lender will release funds in stages while regularly inspecting the worksite.
However, you also need to be aware of the fact that there might be a comparatively bigger initial deposit or the down payment and perhaps a higher rate of interest as the lender considers this a major risk. Nevertheless, it is possible to mortgage a prefab home as far as you are known to the step-by-step guideline that will help you achieve the finance for your dream prefab home.
Step 1: Get an Estimate
The first step is to determine your budget and how much you are willing to spend on your prefab home. This estimate is crucial to know since your lender or the bank will roughly finance you a similar amount. At this point, make sure that your estimates are close enough and you are being honest to the providers.
Depending upon your credit history and goodwill, the lender will provide you with the amount they are ready to offer, the total interest rate, and how much the total fees would cost. Also, remember to get a quote from various lenders in your region to get the best possible price. Since, even a tiny percentage of difference may end up leaving big bucks on the table in the long run.
Step 2: Apply for Prefab Home Financing
Once you have the estimate, the next step is to finalize the plans and designs along with the manufacturer or the prefab provider. Make sure to purchase your home within the limits you mentioned in the estimates. Moreover, once all of this settles, it is now time to apply for the prefab home financing and place a mortgage against the loan.
You need to prepare documents such as tax returns, proof of employment, and the project’s design blueprints. Furthermore, take a look at the list below to find some other necessary documents to get your prefab home financed.
- Detailed account for your debits and credits
- Signed contract with the prefab manufacturer for the home you intend to purchase
- Work history and proof of income for the last few years
- Notarized copy for the deed of your land (if applicable)
- Blueprints that estimate at almost equal or greater the value of your loan
Depending upon the bank or your country may further documents be required. Hence, once your application is approved by the lender, you get a loan commitment that you might need to get signed by your modular contractors or manufacturers. Although there may be a major risk imposed as none of the parties want to provide official documents unless they get proof from the other end. And that is why you need unofficial approvals to get satisfaction. In case you’re leasing the land, presenting these documents would be ideal.
Step 3: Prepare a Disbursement Schedule
Before closing the loan, your lender might want to look through the timeline and schedules for paying the contractor, manufacturer, and other associated costs. At this point, you have to be careful around not paying the contractors if the work has not been delivered while seamlessly paying at each and every ‘milestone’ of the work received.
After each and every milestone, the lender will require proof of completion often followed by an inspection to reach up their satisfaction. This inspection mainly ensures that the lent money is being used for the right purpose and at the right time. Now here lays a major advantage for the prefab and modular homes. Since the overall costs incurred are quite expected as compared to a traditional building which constantly changes, there are lesser risks involved regarding the alteration of payment schedules later.
Step 4: Close the Loan
This is the time to ensure that you have received a government building permit. After the disbursement schedule has been signed and permitted, the loan will be closed. The lender and the borrower at this time will sign off the final documents post which you will be required to pay the closing costs.
Step 5: Build Your Home
It is necessary that you get your home built as fast as possible. Well, unlike traditional homes, prefabs are known to offer quicker construction which is majorly a plus point in the long run. Secondly, make a note that you can’t start paying against the principal until your loan is converted to a mortgage – which happens once the house is complete. So, indirectly, faster construction will lower down the total interest you end up paying.
Hence, gradually once your disbursement milestones are achieved and your completed structure is correctly inspected, appraised, and valued, the construction loan becomes the mortgage or the permanent loan.
Key Points to Note
Apart from this step-by-step guideline, there are a few more things to note when applying for the mortgage for your dream prefab home. Also, remember that you must research well before choosing a specific manufacturer as well as the lender to help you with the cash flow.
- What about the land you intend to place the prefab on? Are you buying or leasing? Oftentimes the prefab homeowners tend to lease the land – but the fact is that in such cases, getting a traditional loan may be nearly impossible. Hence, if your budget allows, try to buy the land, and meanwhile own your home to be able to apply for a traditional loan. However, if the conditions don’t permit you to purchase land – then you might need to apply for a chattel mortgage. In this case, you can finance your prefab home placed on the leased land.
A chattel loan is usually a ‘home-only’ loan as opposed to a ‘home and land’ loan together. The interest rates for these loans are comparatively higher. On the contrary, payback periods are termed shorter of around 15 to 20 years – which is an advantage in the long run as you might have to pay lesser and quickly. Overall, the entire process for these loans is as well lesser as compared to a standard mortgage for prefab. https://www.thebalance.com/borrowing-tips-for-manufactured-and-mobile-home-loans-4148186
- The next point that the bank will notice is whether or not if your home has a strong, permanent foundation. Thus, your prefab home needs to be tied to a permanent foundation – could be a concrete block or poured foundation to ensure that the modular home is not mobile. A prefab on metal or wooden posts may not likely be able to achieve the traditional bank loan as it is not a fixed property.
- Accessibility is another major concern when applying for a prefab building mortgage. Your home needs to be placed closer to where the amenities can be easily provided and there is a direct connectivity for the highway access. The farther the property, the lesser it is likely to achieve the traditional loan from the bank.
- Directly proportionate to accessibility, hooking up to the necessary amenities and services can further make it easier to achieve the loan. Your property should have easy access to water, sanitation, and electricity that passes all the government standards.
Undoubtedly, there may be a few where and how about when it comes to financing the prefabs since it is not as usual as the standard traditional buildings. The process may be easier if you reside in a location where prefab mortgage is the norm and there are a number of experienced lenders to make your work easier. On the other hand, it could be absolutely vice versa if the concept of prefab mortgage is new to your region.
Moreover, if you purchase the land and your prefab home is anchored down permanently to a concrete foundation, it is a plus point in achieving the standard mortgage from the bank. However, throughout the process, it is crucial to stay transparent, effectively communicate, and ask as many doubts as you have with the lender as well as the manufacturer. Mortgaging a prefab may sound daunting but in the present era, it really isn’t.
So, do you feel confident in knowing how to mortgage your prefab home? Or if you have any questions, do let me know your thoughts in the comments below.