Manufactured homes offer an affordable and popular housing option for many, particularly those with modest incomes. However, purchasers often end up using financing that costs them considerably more than they would spend on a mortgage for the same property.
Many purchasers may not be aware that you can finance the purchase of a manufactured, or mobile, home using a conventional mortgage. But you can do so, provided that you either own or purchase the property the home will be sited on, and permanently install the home at its site.
Manufactured homes are a major housing type in the U.S., accounting for one in seven homes outside of metropolitan areas, according to the U.S. Census Bureau. They're particularly popular in southern and western states, where they account for as much as 17 percent of the total housing stock in South Carolina.
Mortgage or chattel loan?
A mobile home financed through a mortgage will generally have a lower interest rate and monthly payments, sometimes by a large margin, than one purchased using a chattel loan, which is the more common type of financing for manufactured homes. Of course, there are certain requirements to meet.
A new report from the Consumer Financial Protection Bureau (CFPB) explores some of the ins and outs of purchasing and financing manufactured homes. Manufactured homes, or mobile homes as they are traditionally known, are usually considered personal property by default. That's because they're mobile and not attached to the land, as is the case with real property (ie, real estate).
Because they're classified as personal property, they're only eligible for chattel loans, a type of loan secured by property that is portable, such as an auto, boat, RV or mobile home - because they're, you know - mobile.
The question of real property
However, a mobile home can legally become real property if it is rendered immobile - that is, permanently attached to a foundation or base. Some three-quarters of all states have legal procedures in place to allow a manufactured home to be reclassified as real property, along with the land it is on.
That makes them eligible for mortgage financing - and potentially lower rates and loan costs. According to the CFPB, the cost of a traditional mortgage can be anyway from one-half a percent to five percentage points lower than that of a chattel loan used to purchase a manufactured home. On a monthly basis, the payments could be as much as 40 percent less - although this may be depend on the borrower's credit and financial profile.
According to CFPB figures, nearly half of all manufactured home residents own both the home and the land it is placed on. Yet nearly two-thirds of them used chattel loans to finance their purchase.
About one-quarter of all manufactured homes sold over the past decade have been classified as real property, according to the CFPB, although that figure has dropped to about 13 percent in recent years.
High-rate, high-cost loans much more common on manufactured homes
Overall, purchasers of manufactured homes incur much higher rates and other loan expenses than do buyers of single-family homes. More than two-thirds of mobile home buyers have what are considered higher-price loans, compared to only 3 percent of buyers of conventional, site-built homes. "Higher-priced" is considered to be a loan with a rate 1.5 percentage points or more higher than the average offered well-qualified buyers.
When points and fees are taken into account, a small but significant share of manufactured home buyers pay far more. One in six manufactured home buyers have what are considered "high-cost loans," in which their APR (annual percentage rate) is at least 6.5 percentage points higher than that given to well-qualified borrowers, according to the CFPB. By comparison, almost no single-family home buyers pay rates that high.
Some examples from the CFPB show how the costs can vary. Assuming a borrower who buys a fairly typical multi-section manufactured home for $80,000 and puts 20 percent down, a 20-year fixed-rate mortgage at 3.36 percent would produce payments of $367 per month. Going to a chattel loan at 4.87 percent - just above the definition of a high-rate loan - yields payments of $418 per month. And if the borrower ends up with a high-cost loan at 9.87 percent APR - again, just above the threshold for that type - the payments would rise to $612 a month.
(These figures don't include the cost of buying or renting the land the home will be placed on. Nor does they include the cost of installation and such add-ons as steps, patios or air conditioning, which can add 25 percent to the price of the unit itself.)
Credit profile, location may be factors
Of course, there may be other factors at play. Borrowers who obtain high-cost chattel loans may do so because their credit and financial profile make them risky borrowers, so lenders charge them more to offset that risk. The CFPB reports that two lenders account for a disproportionate share of high-cost chattel loans for manufactured homes, suggesting that they may be targeting borrowers with higher risk profiles.
Also, it should be noted that you usually can't obtain a mortgage on a unit that will be sited in a manufactured home community, even if it is permanently installed. Because such lots are rented, the homes sited on them generally are not classified as real property. Historically, about a 25-30 percent of new manufactured homes are sited in such communities, a figure that appears to be growing.
Chattel homes are not without their advantages. Closing is faster and less complicated, and the fees may be less than on a mortgage as well, although the incidence of high-cost loans shows that isn't always the case.
On the downside, chattel loans generally have shorter terms than mortgages - 20 years is often the maximum, which raises monthly payments. Borrowers also have fewer legal protections than they do with mortgages, as chattel loans are not covered by the Real Estate Settlement Procedures Act (RESPA).
A manufactured home isn't everyone's cup of tea, although the quality of construction and finish has come a long way from the "trailers" of decades ago. With a square-foot cost about half that of the median single-family home, they offer an affordable alternative for those who'd prefer to own their home rather than rent. If you can swing it, a mortgage may offer a more affordable financing option as well.