Guide to Financing a Modular Home
When building a new home, one of the most important steps in the process is figuring out how to pay for your home’s construction and when building a modular home, the question of financing is equally, if not more, important. That is because some lenders are unable to provide construction loans and mortgages for new modular home projects. Our guide to financing a modular home covers the nuances of the process, including a comparison of financing options, known modular home lenders, a summary of the financing process, answers to key questions that you may have about financing your modular home’s construction and a summary of important terms. Continue reading below for our guide to financing a modular home, or for assistance with your project, connect with one of our prefab concierge representatives.
Comparing Different Financing Options for a Modular Home
Depending on your individual circumstances and the needs of your project, individuals looking to finance all or a portion of their modular home have a few options. While the most straight-forward option to pay for your modular home’s construction is in cash, that is not realistic for many individuals. Next, individuals looking to finance a portion of their project, often up to $100,000, or even the purchase of land, may want to consider personal loans. And for financing the entirety of the home’s construction, individuals may want to consider construction-to-permanent loans.
It is worth noting that the terms and characteristics of your loan will vary based on your chosen lender, the size and scope of your project, and your individual borrower profile. To better understand your options for financing a portion or all of a new modular home, our comparison table breaks down different financing types and key product characteristics like maximum lending amounts, terms, who has control over the payouts, application requirements, interest rates, and application and approval timeframe.
| Construction Loan | Personal Loan | |
|---|---|---|
| Maximum Lending Amount | Millions Can go up to and exceed $3,000,000 |
$100,000 vary based on the institution and creditworthiness but can go up to |
| Term | Up to 30 years Shorter terms are possible |
Shorter terms than other types of prefab financing options LightStream offers personal loans with up to a 7 year term |
| Control Over Payouts & Budget | Banks & Credit Unions Control payouts and must approve all builders and project plans Only in some cases can it be used to purchase land. |
Individuals |
| Requirements | -Completed construction plans -Detailed project budget -Financial history check (often with requirements on minimum credit scores, income, and debt to income ratios) -Minimum down-payment (a standard downpayment is 20% cash down, individuals who already own land can sometimes use the equity in their land towards their minimum down payment) |
-Financial history check (often with requirements on minimum credit scores, income, and debt to income ratios) |
| Interest Paid in Relation to Other Loan Types | Medium | High |
| Application & Approval Timeframe | Months | Days (Some companies offer same day application & approval) |
| Best Used For | Prefab Home Construction | ADU Construction or Tiny Home Purchase, or Land Purchase |
*The information included in the table, particularly, maximum loan amounts, terms, and requirements, will vary based on your individual borrower profile and may differ from lender to lender.
** Individuals who are existing homeowners and are looking to finance the construction of their modular home using equity in their current property can see more information on home equity loans and home equity lines of credit (HELOCs) in our Guide to Financing Prefab Homes
Process for Financing a Modular Home
What is the process of financing a modular home?
The process for financing a modular home is much like that of financing a traditional, site-built home. This process includes:
Finding and owning a buildable lot. This is the easiest way to begin a project - it allows buyers and companies to work together and determine suitable modular homes that can be built on a lot and begin to formulate an initial project budget.
At this point, buyers can also work with a qualified lender to get pre-approved for a loan. This allows buyers to establish an initial budget.
Buyers finalize the home design and the chosen company creates home plans and a detailed project budget, both of which are necessary to officially apply for a construction loan.
Buyers submit final construction documents and financial information for approval. If approved, the funds can be prepared for the initial draw by the manufacturer.
Over the course of construction, periodic draws on the loan are made by the modular home company (and general contractor, if necessary). During this time, payments on the construction loans are typically interest only.
Once the home is completed, the final funds are dispersed to the builder, and the home is approved on the final inspections, payments on the construction loan are made towards both the interest on and principal of the loan for the remainder of the term.
| Financing a Modular Home with a Construction-to-Permanent Loan | ||
|---|---|---|
| Notes | ||
| Land Cost | $60,000 | Owned & Paid in-full |
| Prefab Home Cost | $425,000 | |
| Construction Loan Amount | $400,000 | 18-months interest only, requires 20% project value down, 3.00% interest |
| Cash down | $85,000 (Land Equity + $25,000) |
Includes $60,000 in equity from Land |
| Monthly Payments During Construction | $1,000 | |
| Interest paid during construction | $18,000 | |
| The Home is Completed & Move-in Ready The Construction Loan Transitions into a Traditional Mortgage |
||
| Mortgage Amount | $400,000 | 30-year term, 3% fixed interest rate |
| Monthly Payment | -$1,686 | |
| PLEASE NOTE: THESE MODELS ARE NOT GUARANTEES AND SHOULD NOT BE CONSIDERED FINANCIAL ADVICE. THEY ARE FOR EDUCATIONAL PURPOSES ONLY AND PURELY ILLUSTRATIVE EXAMPLES OF POTENTIAL BUYING SCENARIOS. BUYERS SHOULD DO THEIR OWN DILIGENCE BEFORE MAKING ANY PURCHASE. | ||
Frequently Asked Questions
Can you finance a modular home?
Yes. Although not all banks and credit unions finance the construction of modular homes, they can still be financed with construction or construction-to-permanent loans, much like those used for a site-built home.
Why is it more difficult to finance a modular home than a traditional site-built house?
Due to the way the draw process is structured on most traditional construction loans: draws are spaced out over a series of checkpoints throughout the build process - and the construction timeline on a modular home: site preparations and module manufacturing can take place at the same time and often early on in the project timeline which requires more capital, earlier on in the process, some banks do not offer lending on modular home projects.
Do all banks finance modular homes?
Not all banks finance modular homes. We have found a number of financial institutions that regularly work with individuals to finance prefab projects. See our full list of companies that finance prefab projects.
What is required to finance a modular home?
In addition to required financial information (credit check, income information, financial history, etc.) individuals applying for a construction loan must also submit detailed information on their chosen company, project plans, and a detailed project budget.
Companies That Finance Prefab Projects
One Trust - Construction to Permanent Loan
Umpqua Bank - Construction to Permanent Loan
Washington Federal - Construction to Permanent Loan, Lot Loan
US Bank - Construction to Permanent Loan
LightStream - Personal Loan
RenoFi - Home Equity Loan, Home Equity Line of Credit
Key Terms
Modular Home - one of the most common types of prefab construction, modular homes are built using box-like home modules that are constructed off-site and later joined together and placed on a foundation at the final build site. Home modules can be delivered up to 95% complete and often require the least amount of on-site work. Modular homes appreciate (or depreciate) in value the same as a site-built home.
Common Loan Types - not all banks/credit unions are able finance certain types of modular home project, nor do all lenders offer the same range of financing options. The best option for your situation will depend on your project type and individual needs. Common loan types for modular home construction include:
Construction Loan - often short, 1 to 2 year loans, that are used to finance the construction of your modular home. During construction, borrowers typically pay interest only on the borrowed amount, and once construction is complete, borrowers typically refinance the loan into a long-term mortgage. Draws on the loan are periodically made at predetermined intervals in the project to the manufacturer and/or general contractor. Depending on your chosen lender and project type, not all banks offer construction loans on prefab projects.
Construction-to-Permanent Loans - also called “single close” loans, this type of loan has the same type of structure as a construction loan but is automatically rolled into a mortgage once the construction process is complete, eliminating the need to refinance the loan.
Home Equity Line of Credit (HELOCs) - a line of credit that allows borrowers to borrow against the established equity in their home. It operates similarly to a credit card in that borrowers have access to a certain amount of money and if paid down, can access more of their line of credit. There is typically a period where individuals have access to their line of credit and then a set repayment period afterwards.
Home Equity Loan - similar to a HELOC, individuals borrow against their equity in their home however, it is a one time loan rather than a line of credit. Therefore, individuals can borrow up to their approved amount on a one time basis and then make set payments over the term of the loan.
Cash-out Refinance - this replaces one’s current mortgage with a new mortgage and the difference in value between the two is paid out in cash. For example, an individual has $150,000 remaining on their current mortgage but opts to refinance their mortgage for $250,000. They receive the difference, $100,000, in cash and take on a new mortgage of $250,000.
Personal Loan - money borrowed from a lender for a range of purposes that is paid back in monthly installments. Personal loans typically for less money and have shorter terms than construction loans and home equity-based loans. There
If you are a lender that finances prefab construction projects and want to be included on our list of companies that finance modular homes, contact us at info@prefabreview.com. Or, if you know a company that finances modular home projects, contact us at info@prefabreview.com
