Modular Homes HQ

Financing a new modular home construction project can be a daunting, although ultimately rewarding, process. If you are new to the financial process of building a new home, here is information that will help you to know what to expect, in order to familiarize yourself with the process so that you can make the best decisions for your home construction project.

Before you contact lenders, you need to understand the difference between home mortgages and home construction loans. Being informed about the difference between these loans can help you to know which will be best for you.

A mortgage is a loan in which the home stands good for the amount of the loan; therefore, a mortgage is not feasible for a home that has not been constructed. For a home construction project, you will need to obtain a construction loan.

Construction loans, unlike mortgages, are meant to finance the home construction project, then be converted into traditional mortgages and/or construction-to-permanent loans. Construction loans are typically interest-only loans for which the principal is due upon completion of the construction project. This principal is paid using the funds from the traditional mortgage that is then placed against the home’s value, or the permanent loan component of the construction-to-permanent loan.

Financing your new modular home construction with a traditional mortgage means that you will need to have the financing for the mortgage ready by the time that the home is completed. The advantages of using a mortgage to complete the financing of your construction loan are that you are often able to negotiate using current interest rates; while a construction-to-permanent loan often locks you into the interest rate that was current when the project began, several months to even a year before construction is completed, a mortgage can be negotiated with interest rates that may have dropped since construction began. The drawbacks to using a mortgage rather than a construction-to-permanent loan are that you essentially have to do twice the work – in other words, you must do all the loan paperwork again.

Using a construction-to-permanent loan also has its advantages. In the construction-to-permanent loan, the process is simplified because there is only one loan application and one loan closing. The money for the construction is provided at the beginning of the construction process, and the loan is converted to a mortgage when the construction is complete. While the interest rate for both the construction part of the loan and the mortgage part of the loan is often fixed at the beginning of the construction project, there are also loans available that allows the interest rate to decrease if interest rates decline. The biggest drawback inherent to construction-to-permanent loans is the fact that interest rates are typically set at the beginning of the construction project, which can mean that you end up with a higher interest rate than competitive mortgage rates. However, these higher interest rates can be countered by refinancing your construction-to-permanent loan to take advantage of a lower interest rate if one can be found.

Understanding the different lending options that you have when constructing a modular home is important; just as important is making sure that your lender is familiar with modular homes. While modular homes have more in common with traditionally built homes than with manufactured homes, many lenders do not realize that there is a difference in modular homes and manufactured homes, which can make the process of financing your new modular home construction project challenging. Be prepared to educate your lender about modular homes, or, search the internet for lenders who have experience in financing modular homes.

Once you have found a lender who understands modular home construction projects and whom you are comfortable with, ask to be pre-qualified for a construction loan. Pre-qualifying for your construction loan is important because it will help determine how much money is available to you for your construction project, which will then determine what size home you can build. If you own the land the home will be constructed on, let the lender know, as this land can help stand good for the house, which adds equity upfront.

Keep in mind that pre-qualifying does not guarantee you a loan, or even a specific loan amount; it will, however, give you an estimated idea of how much money you can obtain for your project – and how much home you can build. Another thing to remember is that the pre-qualifying process will not involve a credit check, and therefore will only be successful if you are honest about your financial information.

After you have completed the pre-qualifying process, you are ready to proceed with your construction loan and the construction process. For further information about this process, please see the next article in this series, “Financing Your Modular Home, Part 3 – Construction Loan to Constructed Home.”

Tags: Financing, financing your modular home, Modular Home, New Home, New Home Construction Financing