How to Finance a Prefabricated House?

One way to enter the real estate market affordably is to buy a manufactured home. Before we dive into how to finance a manufactured home, it’s important to consider what a prefab home is.

“Today’s manufactured homes are built to code according to the U.S. Department of Housing and Urban Development (HUD) and in many cases look nearly identical to traditional homes,” says Brad Nelms, president and CEO of Newport Beach-based “Prefabricated homes are designed and built in a factory to be efficient and then moved to a new location, but they are no longer meant to move back and forth.”

Finance a Prefabricated House
Finance a Prefabricated House

The main difference between a prefabricated house and a house built on site is a much lower price. According to a recent study, the cost is 10 to 20 percent less than building a “stick-built” home.

Prefabricated home builders offer buyers a wide variety of home designs and improvements similar to those of traditional builders. From sloping roofs to multi-story homes and those equipped with high-tech voice controls, modern prefabricated homes can have everything you want.

Getting a mortgage for a manufactured home is no harder than getting a loan for a traditional home, you just have to go through a different process.

Loans for manufactured homes come from several sources: Fannie Mae and Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Agriculture, and the Department of Veterans Affairs (VA). In some cases, you can also get a personal loan.

FHA Funding

Under the Title I program, the FHA insures loans for manufactured homes in the same way that it guarantees loans for traditional homes. Homebuyers can use their loan to get the prefab home, the lot it sits on, or both.

To obtain an FHA-backed loan, the manufactured home must be considered real estate (meaning it is on an approved permanent basis), at least 400 square feet, and must pay taxes as real estate. In addition, the home must have been built on or after June 15, 1976 and have a HUD certification, otherwise it is considered personal property, not real estate.

Many lenders are happy to finance FHA-insured manufactured homes. However, it is important to note that these are not federal government loans or grants, they are simply FHA insured. A down payment of at least 3.5 percent is required and the interest rate must be fixed for the entire term of the loan. FHA loans differ from traditional mortgage loans when it comes to the duration of the loan. A typical mortgage has a maximum loan term of 15 or 30 years. Title I loans for manufactured homes have shorter maximum loan terms:

Maximum Loan Terms in a Prefabricated Home

  • Prefabricated or prefabricated house of a single section
  • House and lot: 20 Years
  • Prefabricated house and lot: 15 Years
  • Prefabricated house of several sections and lot: 25 years

There are limits on how much you can borrow when buying a manufactured home with an FHA loan. The maximum loan amounts for a manufactured home are lower than those for a traditional home, but in high-cost neighborhoods, you may be able to further increase your loan maximum.

Maximum Loan Amounts for Prefabricated Homes

  • Single prefabricated house: $70,000
  • Lot only: $23,000
  • Prefabricated house and lot: $93,000

Financing of “Fannie” and “Freddie”

If you own or plan to purchase the land your manufactured home is on, you may be eligible for a government-backed Fannie Mae or Freddie Mac loan. The programs offer 30-year fixed-rate mortgages or 7/1 and 10/1 adjustable-rate mortgages with low interest rates and fees.

Fannie Mae’s MH Advantage mortgage is designed specifically for those who plan to own their manufactured homes and land. Requires:

  • A down payment as low as 3 percent
  • An MH Advantage sticker that ensures the home has many of the same features as a site-built home
  • The home must be at least 12 feet wide and a minimum of 600 square feet
  • The house must be attached to a permanent base

Like Fannie Mae, Freddie Mac loans also require borrowers to own the land, but these allow the owner to use the manufactured home as a second home. These loans have a wide range of terms: some are fixed-rate mortgages, others are 7/1 and 10/1 adjustable-rate mortgages. Other requirements include:

  • A down payment of at least 5 percent
  • The house should not be considered an investment property
  • The home must be certified to demonstrate that the foundation meets HUD requirements

USDA Loans

Buyers who don’t have the money for the down payment may consider a loan from the U.S. Department of Agriculture. Like FHA loans, the USDA secures the loan from a participating lender, allowing you to access low interest rates.

Known as “no down payment loans,” they are similar to other programs in that they require the house to sit on a permanent basis and for both the land and the house to be financed together. There are also income limits to qualify for a USDA mortgage loan, but they vary by location and depend on several factors, such as the size of your home. Some of the additional restrictions on USDA loans include:

  • The house must be less than a year old and at least 400 square feet
  • The home must be certified to demonstrate that the foundation meets HUD requirements
  • A credit score of 640 or higher ensures streamlined processing; anything less must meet stricter standards

VA Loans

Veterans may be eligible for loans from the Department of Veterans Affairs (VA). VA loans for manufactured homes are generally harder to obtain than conventional home loans, especially if you have a low credit score.

Some of the benefits of VA loans include lower interest rates than conventional loans and zero down payments. While there is no mortgage insurance requirement, there is a financing fee of between 1.25 and 3.3 percent to cover the cost of foreclosures.

Like other financing options, the home must be attached to a permanent foundation and sit on land owned by the borrower. There are no minimum credit score requirements, but loan amounts cannot exceed 95 percent of the purchase price. As for the terms, these are the maximums:

  • Single width unit with or without batch: 20 years, 32 days
  • Single double width unit: 23 years, 32 days
  • Double width unit and lot: 25 years, 32 days
  • Lot only: 15 years, 32 days

Movable Property Loans

If the manufactured home is considered personal or movable property, or if you are having difficulty obtaining financing, you may want to consider a personal loan. These loans require at least a 5 percent down payment and rates are generally higher. On the other hand, there is no approval of the property involved. The loan is based on your ability to repay the credit, not on the condition or age of the home. You may be able to get financing faster, sometimes in a week or less. This is a great option if your manufactured home is on wheels or if you just can’t afford it otherwise. The terms and maximum loan amounts depend on your credit history and require negotiation with your lender.

Home Equity Loans

First, you can’t be underwater on your mortgage. Showing an up-to-date payment history will be key. You must also own the land on which your prefabricated house sits and must have a permanent foundation. Whichever route you choose to finance your manufactured home, it’s a good idea to work with a lender that specializes in loans for manufactured homes. They can help you navigate through the process and know the nuances of financing a manufactured home better than lenders who mostly finance traditional homes.

Once you’ve owned a manufactured home for a while, you can start thinking about doing some remodels. Some experts say it’s hard to get a home equity loan or line of credit because manufactured homes depreciate faster than traditional homes. While that’s generally true, it’s possible if you meet several criteria.