Your Guide to Determining the Best Way To Finance a Modular Home

The decision to build a modular home comes with many important decisions. Many of those decisions will have to do with the design of your new home — floorplan, features, finishes, and more. Before you jump into designing your modular home, though, there’s one other vital decision you’ll need to make. How are you going to pay for your new home?

If you have the money saved up, you could cover the entire cost of your build with cash. Your other option is to finance it. 

When it comes to the different ways to finance a modular home, you have several options. Understanding what’s available and how different types of financing work will help you find the best solution for your situation. 

What Is a Modular Home?

A modular home isn’t all that different than a stick-built home. It’s a home that sits fixed on a foundation. The main difference between the two is their construction process. With a stick-built home, builders construct your home entirely on-site. The majority of the modular home construction process takes place in a factory. After delivering the components of your home to your property, the builders finish assembling it on the foundation. 

There’s a common misconception that modular homes are lower-quality than stick-built ones. Both stick-built and modular homes must meet the same state and local codes. After completion, there’s no telling the difference between the two.

How Much Does a Modular Home Cost?

Generally speaking, modular homes cost less than stick-built ones, and they typically take less time to build. For one thing, you don’t have to worry about fees for an architect or general contractor. Permit fees and labor costs tend to be lower than those for stick-built homes, too. Homebuyers can save an average of 20% to 30%. 

Keep in mind that this isn’t always the case. Factors like numerous customizations, delivery fees, and crane fees — if necessary — can increase the overall cost of your modular home. An experienced modular home builder can help you understand the costs of your home so that you know what to expect. 

What Are Your Modular Home Financing Options?

When it comes to modular home financing, you have all the same options as you would for a stick-built home, including:

  • Conventional home loans or mortgages
  • FHA home loans
  • VA home loans
  • USDA home loans
  • Personal loans

Another financing solution for building a modular home is a construction loan. In other words, you have a lot to consider. Let’s take a closer look at your options.

New Construction Loan

A construction loan is a short-term loan that covers the cost of actually building your modular home. Before your lender approves your loan application, they’ll need to see your modular home building plans and approve your builder. As there isn’t a finished house to use as collateral, which is typical of mortgages for existing homes, your bank will also likely require you to put in all of the necessary equity at the beginning.

Most modular home builders require a construction loan to finance your build. You typically have two options:

  • Construction-only
  • Construction-to-permanent
Finance a modular home: 2 types of construction loans

A construction-only loan covers only the cost of building your modular home. It typically includes the costs of the land, building materials, labor, and permits. You’re responsible for repaying the loan in full at maturity or securing permanent financing — a mortgage. If you do need a mortgage, you’ll have to find a lender, close on a second loan, and pay a second set of closing costs. With a construction-to-permanent loan, your construction loan converts into a mortgage after your builder finishes your home. These loans require only one closing and allow you to lock in your interest rate early on. 

Construction loans have a draw or draft schedule that follows your build schedule. Rather than disbursing a lump sum, a lender pays out the funds in stages. One of the main benefits is that these loans tend to have lower monthly payments because you typically make interest-only payments during the construction of your home. However, interest rates are often higher, and you have to meet stricter requirements to qualify.

Some of your more financially secure builders can carry out the construction loan in-house and will either build that cost into their pricing or charge a flat fee. Century Home Builders charges a flat fee, which allows you to see your actual costs. You have no payments or closing costs until we complete your modular home. Most clients save $1,500–$2,500 this way.

An in-house construction fee also enables you to enter the building process sooner. You don’t have to go through all of the red tape of closing a construction loan with a bank, which can save you 30–60 days of waiting. 

Mortgage Loan

A mortgage is a type of loan that you use to finance the purchase of a property. It’s a secured loan, meaning that you provide collateral — your home — that your lender can then take possession of if you stop making payments. 

The term “mortgage” can refer to several different types of home loans, many of which we’ll cover here, including conventional home loans/mortgages and government-backed loans. They may be fixed-rate, meaning that you maintain the same interest rate throughout the life of your loan, regardless of what happens to mortgage rates over the years, or adjustable-rate, meaning your rate can fluctuate with market conditions.

Conventional Home Loan/Mortgage

“Conventional home loan” — which is often used interchangeably with “mortgage” — refers to a mortgage that isn’t insured or guaranteed by the government. Private lenders, including banks, credit unions, and mortgage companies, typically offer them. They’re one of the most popular options for those looking into modular homes. However, they tend to have the strictest requirements. Most lenders require a credit score of at least 620 to qualify. You’ll need an even higher credit score if you want to get the best interest rates.  

FHA Loan

An FHA loan is a mortgage loan that the Federal Housing Administration (FHA) insures. These home loans make homeownership possible for buyers who don’t have stellar credit or who are moderate to low-income borrowers. You’ll need a FICO score of 580 or higher to qualify.

An FHA construction-to-permanent mortgage does help you avoid the two closings, multiple fees, and potential changes in market conditions that could impact your interest rates. However, lenders offering this type of loan can be a bit challenging to find. Standards are also a bit stricter than a traditional FHA home loan.

VA Loan

A VA home loan is a Department of Veteran’s Affairs-insured loan option only available to active-duty service members and military veterans, as well as eligible surviving spouses. It comes with several significant benefits, including no private mortgage insurance requirement, no down payment, and lower interest rates. 

If you meet the qualifications for a VA modular home loan and decide you want to go this route, you’ll want to be sure that you’re working with a VA-certified builder. You’ll also want to be certain your lender is capable of doing both a VA home loan and a construction loan. 

USDA Loan

Another option is a USDA modular home loan, which the US Department of Agriculture insures. It’s a type of loan that helps moderate to low-income borrowers purchase or build homes in a USDA-eligible rural area. Eligible borrowers with low incomes may also be able to get their loans without a down payment. 

Like the other government-backed loans, you can use a USDA loan to finance the cost of building a modular home. You will have to meet several requirements, though. For instance, the land must be in a USDA-approved rural area, and you must use an approved builder — who will need to complete your construction within 12 months. 

Personal Loan

As modular homes typically cost less than stick-built homes, you may be able to finance the cost of your construction with a personal loan — if your budget allows. The main benefit to using a personal loan is that you don’t need collateral. In other words, if you default on your loan, your lender can take possession of your home and start the foreclosure process. The application process is generally faster and easier, too. 

There are a few downsides to using a personal loan, though. First, because these loans don’t need collateral, your interest rate is likely going to be higher than if you were to use a home loan option. Second, terms for personal loans are typically much shorter. Where a home loan terms are typically 15–30 years, most personal loans usually range from 1–5 years. Some may have terms as long as 7–10. 

How Do You Apply for a Modular Home Loan?

Finding and securing financing for your modular home is a bit of a process. However, you’ll want to take your time and do your research to ensure you find the right loan at the best rate.

Get Pre-Approved

You’ll often hear the terms “pre-qualification” and “pre-approval” when it comes to buying or building a home. A pre-qualification uses basic information to give you a general idea of how much a lender may approve you for if you apply. A pre-approval takes that one step further by delving a bit deeper into your finances and credit history. As such, it provides you with a more accurate figure. 

Compare Quotes From Multiple Banks

You’ll want to get pre-approval from at least three different lenders. That will allow you to compare rates, fees, and other pertinent information, allowing you to find the best loan at the best price. While each lender will pull your credit history, mortgage-related inquiries typically only count as one hit on your credit report if you request each pre-approval within a set timeframe. 

Apply and Get Approval

After planning and choosing your land, it’s officially time to apply for your loan. If everything’s in order, the bank will approve your loan and send you a letter of commitment. You can show that letter to your builder, or the seller of the land you’re purchasing, so that they can sign the final contract.

Establish Your Payment Timeline

Your payment timeline establishes when the bank will disburse funds to your builder. As they reach each milestone, the bank will release the next disbursement. 

Close the Loan

Next, you’ll officially close on the loan. You’ll sign the necessary documents, as will your lender. You’ll also pay your closing costs if you have any.

Home Build

As your builder constructs your modular home and your bank disburses funds, you’ll make interest-only payments. Keep in mind that you won’t be able to make any additional payments toward your principal during this time.

Turn the Construction Loan Into a Permanent Mortgage

Once your builder completes your modular home, your bank will convert your construction loan into a permanent mortgage. At this point, you’ll be making payments toward principal and interest.

What Documents Do You Need To Finance a Modular Home?

You’ll need several documents to finance a modular home, including:

  • Your identification, such as your driver’s license
  • Personal finance statement
  • Your W-2s from the past two to three years
  • Proof of employment
  • Work history for the last five years
  • Your most recent paystubs
  • Your tax returns for the past two to three years
  • A credit report
  • Your bank statements
  • A detailed account of assets and debts
  • Information on any outstanding loans
  • A contract from your modular home builder

What If You Already Own the Land?

If you already own the land, you’ll need to include a notarized copy of the deed when you apply for financing. You may also be able to use that equity toward your loan’s down payment. 

What Happens If Construction Takes Longer Than Expected?

When you apply for financing, you’ll be selecting a period of payment based on your modular home’s construction timeline. While modular homes typically take less time to build, things can happen. Should the process take longer than the timeline you initially chose, you will have to pay any additional charges or fees related to that extended period.  

Find the Best Modular Home Financing Solution for You

While you have several options when it comes to modular home financing, a construction loan is typically going to be your best option. It protects you and the lender should something happen that extends your build time and helps you avoid the stress of finding another place to live if your builder doesn’t complete the project on time. It also ensures that your builder doesn’t have to rush through the construction process. 

Choosing a home is one of your biggest life decisions. Make sure that you start your journey by doing your research to find an experienced modular home builder. At Century Homes, we’re committed to guiding you through the process to make sure that you’re informed about your options and that you’re selecting the right home for your needs. Contact Century Home Builders today to learn more.