Manufactured Housing: Different Type of Home, Different Type of Mortgage

10/20/2005

If you are thinking about buying what the trailer and pre-fabricated housing industries call manufactured housing (MH), you are looking at more than just a different type of home. You also are looking at a different type of home loan. The interest rate will be a bit higher, the terms will be years shorter and the qualification process a bit more exacting than when getting a loan for what the MH industry calls a stick home. But the home itself will probably be a lot cheaper.

The biggest advantage of MH is that it costs less, explains Brian Costello, a loan officer with Manufactured Home Loans, in Vancouver, Washington. That is why it attracts so many senior citizens, people living in rural areas, and others looking for low-cost housing. For many people, MH is the only real alternative to renting, and, since they are buying, they get the income tax benefits of homeownership. Their mortgage interest is tax deductible. While many look at a manufactured house as a retirement home, others look at it as a starter home. There also are some who look at it as vacation property -- as a second home.

While there really are $300,000 mobile homes, the typical home is between $80,000 and $90,000, and it is a doublewide unit, Costello says. In terms of financing them, they are treated more like personal loans. There is no real estate involved as there is on a conventional home. That is one of the reasons why MH is considered more of a high-risk loan as far as a lender is concerned. The criteria are harder for manufactured homes. There is no room for flexibility. With a conventional loan, the lender can play with the figures a lot more than we can.

Because it is a higher risk loan, the rates for MH are higher and the time you have to pay it off is shorter. There are no 30-year loans for trailers. The outer limit is 20, and lenders like to see people pay them off in seven years, he adds. If you have perfect credit, the right income and enough money for a 20 percent down payment, you could get a 30-year loan for a stick house at 5.75 percent. That same person looking at MH with 20 percent down would pay 6.25 for seven years.

The interest rate would go up for a longer-term loan. For 20 years, with 20 percent down, it would probably be 8 percent.

Let's look at why. First, unlike conventional homes, which tend to increase in value over the years, the values of trailers and other types of manufactured housing tend to decrease. Trailer prices can be tracked at www.nada.com, a service much like the Kelley Blue Book that tracks and reports the values of used cars. Unlike used cars, which usually have a higher interest rate than new ones, with manufactured housing the rates are the same for both new and used models.

Second, as the name implies, a trailer is mobile. While some MH is bolted to a foundation, the vast majority of trailers can be hooked up to a truck and towed away, which can make them pretty hard to foreclose on.

Third, most MH loans are for the trailer itself. In terms of the loan, the trailer is not tied to the land it sits on. With a stick house, the land it sits on has value. Most trailer owners rent the land in mobile home villages and trailer parks. Some lenders do offer mortgages on MH and property together, but when they do the MH normally has to be permanently fixed to the land.

Then it's real estate. Our company doesn't handle real estate. We just handle manufactured housing, Costello explains.

There also are differences in how you get a loan, he adds. For a loan on a stick house, you can go to a bank and get prequalified; let's say for up to $250,000. Then you go looking for a home.

It's not like that with trailers. First you go out and find the trailer you want. We make loans on a specific home. The home has to book out, appraise, for what the sellers are asking. You also have to have a place to put it.

So while the loan may be approved, it is conditional on the buyer being approved by a trailer park. With most parks, you have to qualify to get into the park. I have had loans where we conditionally approved the loan but the park didn't approve the people. Then they have to find another park before we will approve the loan. And most trailer parks sign long-term contracts.

Costello says that when they qualify people for a trailer they look at both the monthly payment on the trailer, and on the space in the trailer park. The buyer has to be able to afford both.

This also is another reason why trailers are higher risk loans than stick homes. Let's say I buy a regular home, and don't pay for six months. They repossess my home. With a trailer, they repossess the trailer but they have to continue paying rent on the space it sits on while the lender looks for another buyer.

Some people have manufactured housing custom built. If you go to a dealer to have it built, we won't finance it unless the dealer agrees to set it up on the space where you are going to have it. Then it has to pass an inspection before we will finance it. Costello adds that many people who buy directly from a dealer, with dealer financing, wind up refinancing with an MH lender later for a better rate.

A mobile home might not be your first choice when it comes to buying a home. However, as home prices continue to climb across much of the nation, it is turning into the only affordable option for many people. While it might not appreciate in value, it does give you the tax advantages of homeownership. And even though MH is a different type of home, it can still be a home of your own.