A wood cutout modular home frame sitting atop stacks of quarters

If you’re in the market for a new home, you may be considering modular construction.

Modular homes, also known as prefab homes, are becoming increasingly popular because they are typically more affordable than traditional homes and can be built more quickly. But financing a modular home can be tricky, so knowing your options is essential. 

This article will discuss the various financing options for modular homes and how to get the best rates. Read on for in-depth information on these topics and tips for finding the best financing for your new house.

What Are the Best Options for Financing a Modular Home?

Your best options for financing a modular home include a conventional 30-year fixed-rate mortgage, FHA financing, traditional Fannie or Freddie mortgages, VA financing, and USDA financing. Other options are home equity loans/lines of credit, cash payments, and personal loans.

These loans have different down payment requirements, interest rates, and eligibility criteria, so it’s crucial to compare them before choosing one.

What Are the Different Modular Homes Financing Options?

The following table summarizes crucial information about the financing options we’ve mentioned:

 Loan TypeFeaturesDown PaymentMinimum Credit Score
FHA LoansThey’re government-backed. They offer flexible terms. They come with low interest rates.3.5%  580
Fannie/Freddie MortgagesThese are available through private lenders.20%620
VA LoansThese are available to active duty or retired US military members.NoneNone
USDA LoanAvailable to US citizens in rural areas.NoneNone
Home Equity Loan/Lines of CreditYou can use your current home as collateral.10%620
Cash PaymentYou use cash to finance your home, so there’s no need for a loan.NoneNone
Personal LoanYou don’t need to give up any collateral.3%620

Now let’s look at the above loans’ features, terms, and pros and cons.

FHA Loans

The Federal Housing Administration (FHA) offers a loan program that you can use to finance modular homes. These loans are available to all homebuyers, not just first-time buyers. 

A calculator sitting next to an FHA loan application on a tabletop

The main advantage of an FHA loan is that it has more flexible credit requirements than other loans. That means you may qualify for an FHA loan even if you have less-than-perfect credit. 

The down payment for an FHA loan is just 3.5%, and the minimum credit score required is 580. Remember that the lower your credit score, the higher your interest rate. 

Other benefits of FHA loans include:

  • They don’t have minimum income requirements
  • They charge low interest rates
  • They give you the option to make a smaller down payment

The main disadvantage of an FHA loan is that you’ll have to pay mortgage insurance if you put down less than 20%. Mortgage insurance protects the lender if you default on your loan.

Traditional Fannie and Freddie Mortgages

A traditional Fannie or Freddie mortgage is a home loan not guaranteed or insured by the federal government. These loans are available through private lenders and often require a higher credit score than an FHA loan.

However, they do offer competitive interest rates and other benefits such as:

  • Larger loan amounts
  • No mortgage insurance requirement
  • Flexible repayment terms
  • Options to refinance or consolidate your debt

The disadvantages of a traditional Fannie/Freddie mortgage are:

  • You’ll likely need a down payment of at least 3%
  • You may need a credit score of 620 or higher to qualify

VA Loans

If you’re on active duty or a retired US military member, the VA loan program is one option to consider for financing a prefabricated home.

This type of loan offers several benefits, including:

  • No minimum down payment
  • Low-interest rates
  • Flexible credit requirements

However, the VA loan process can be more complex than other options, so working with a lender experienced with VA loans is essential. Additionally, there may be fees associated with getting a VA loan, such as funding fees.

USDA Loans

A key to a modular home with a keychain emblem in the outline of a house that reads "USDA Loan" sitting on top of a stack of cash

You may be eligible for a USDA loan if you’re looking to finance a prefab home in a rural area. These loans are available through the US Department of Agriculture and offer competitive interest rates, no minimum down payment, and flexible credit requirements. 

The downside is that USDA loans are only available in certain areas, and you may need to meet specific income requirements or use an approved lender.

Home Equity Loans or Lines of Credit

Another option for modular home financing is to use the equity in an existing home as collateral. One way to do this is through a home equity loan or line of credit, which allows you to borrow a specific sum of money at a fixed interest rate. 

Advantages of using this type of financing include a lower interest rate and the flexibility to use the funds to pay for any costs involved in building your home. However, be warned that this type of financing will require you to use your property as collateral.

A Cash Payment

If you have enough cash, you may also consider paying for your modular home in cash. Doing so may save you money on interest, and you’ll likely have more negotiating power regarding the home price. 

A homeowner spreading a wad of cash while calculating the down payment for his modular home financing

Other advantages of paying cash for a home include:

  • You’ll avoid taking on debt
  • You won’t have to worry about making monthly payments
  • You may be able to get a discount on the home price

However, remember that paying cash for a modular home will likely tie up a large amount of your money, potentially limiting your ability to cover other expenses.

A Personal Loan

Another option for financing a modular home is to take out a personal loan. This type of loan can be used for any purpose and can often be obtained without collateral. 

Advantages of taking out a personal loan include:

  • Getting a competitive interest rate
  • No prepayment penalties
  • The flexibility to repay the loan over a more extended period

However, it’s essential to research and compare personal loans from different lenders before deciding.

Caveat: As a rule of thumb, you should use personal loan financing as a last resort, especially if you’re considering using it as a downpayment for another loan. It comes with a higher risk than other options on this list, including mortgage lenders rejecting your request because it shows you don’t have enough cash to commit as a down payment.

The Takeaway

Several financing options are available for modular homes, including FHA loans, traditional mortgages, VA loans, USDA loans, home equity loans/lines of credit, and personal loans.

Depending on your financial situation and needs, one of these options may be a better fit for you than the others. Talk to a financial advisor or lender to get more information and find the best option for your prefab dwelling.

How To Go About Getting a Loan for a Modular Home

A clear understanding of the financing process is critical for getting a loan for a modular home. Otherwise, you may pay more than you need to or fall behind on payments.

If you’re not sure where to start, here are a few tips on how to get a loan for a modular home:

Determine How Much Money You Need for Construction

The first step is determining how much money you need for construction. That will give you a better idea of what type of loan you need and how much you can borrow.

A couple of homeowners hold a piggybank and research on a laptop to determine the money needed for their modular home financing

Here are a few guidelines to keep in mind when estimating construction costs:

  • Look at the total cost of building your house, including labor and materials.
  • Consider any permits or fees that may be required for construction.
  • Factor in the cost of any customizations you want to make to your home.

Research Different Lenders To Find the Best Terms

Once you know how much money you need for construction, it’s time to research different lenders and their loan terms. That can involve checking rates, fees, repayment options, and other details.

Here are some tips to keep in mind when researching lenders:

  • Ask friends, family members, or coworkers for advice on lenders.
  • Look online for reviews of different lenders and check with the Better Business Bureau to see if there are any complaints against them.
  • Compare interest rates, fees, and other terms offered by different lenders.
  • Choose the lender that offers the best terms for your needs.

Complete the Loan Application 

Once you’ve chosen a lender, it’s time to complete the loan application. You can do this online or in person.

Ensure that you have all the required information and documentation when filling out the application, such as:

  • Your personal details (including name, address, and Social Security number)
  • Your income information (e.g., pay stubs or tax returns)
  • Any assets you own (e.g., bank accounts or property titles)
  • The estimated cost of your construction project

Answer all questions truthfully and accurately to avoid delays or problems with your loan.

Wait for Approval and Sign the Loan Agreement

After submitting your loan application, all you can do is wait for the approval. Depending on the lender, the process can take a few days or weeks. Once approved for the loan, you’ll need to sign the loan agreement.

The document will outline the terms of your loan, including:

  • The interest rate
  • The repayment schedule
  • Any fees or penalties

Tip: Ensure you read and understand the agreement before signing it. If you have any questions, ask the lender for clarification.

How To Get the Best Rates on Modular Home Financing

To get the best rates on prefab home financing, use these tips:

  • Know what you want before shopping
  • Get your credit score in order
  • Compare the interest rates and terms lenders offer
  • Ask about hidden charges
  • Be prepared to put down a significant down payment

Let’s look at each of these tips in more detail.

Know What You Want Before Shopping

The first step to getting the best rates on modular home financing is to know what you want before you start shopping. That way, you can narrow down your options and choose the best loan for your needs. 

For example, if you know you want a 30-year fixed-rate mortgage, you can compare rates and terms from different lenders to find the best deal.

Here are a few things to keep in mind when deciding what you want:

  • The type of loan you need (e.g., fixed-rate or adjustable-rate) – do you want a loan with a fixed interest rate that will stay the same over the life of the loan? Or are you willing to take the risk of an adjustable-rate mortgage, where your interest rate could go up or down in the future?
  • The loan term – how long do you want to have to repay the loan? The most common terms are 15 years and 30 years, but you may be able to find a loan with a shorter or longer period.
  • The down payment – how much money do you have available for a down payment? Remember that the larger your down payment, the lower your interest rate will be.
  • Your credit score – lenders use your credit score to determine the interest rate they’ll offer you. The higher your score, the lower your rate will be.

Get Your Credit Score in Order

It would help if you had a good credit score to get the best rates on modular home financing. Lenders use credit scores to determine the interest rate they’ll offer. The higher your score, the lower the interest rate you qualify for.

If you’re unsure of your credit score, you can get a free credit report from Experian, TransUnion, or Equifax at AnnualCreditReport.com. 

Once you have your credit score, go through each item and improve it quickly if necessary.

Compare the Interest Rates and Terms Lenders Offer

Once you know what you want, you can start shopping around for the best rates. Take the time to compare rates from different lenders and note any other vital terms they offer, such as fees or penalties.

Some things to consider when comparing rates and terms include:

  • The interest rate – this is the amount you’ll pay on your loan in the form of interest each month and will largely determine how much you end up paying. The higher the rate, the more you’ll pay over time.
  • The loan fees: There may be specific charges associated with your loan that can affect how much you pay in total.
  • Additional terms or restrictions – is there a minimum credit score required? How long is the grace period to make your first payment? What penalties will you face if you miss or make a late payment?

Ask About Hidden Charges

When comparing loans, don’t forget to ask about any hidden fees or charges that could impact how much you pay.

Some of the hidden fees lenders may charge are:

  • Origination fees
  • Processing fees
  • Closing costs

Be sure to ask about all fees to compare apples to apples.

Be Prepared To Put Down a Large Down Payment

If you’re looking for the best rates on modular home financing, be ready to make a sizable down payment. A greater down payment will lower your interest rate, ultimately reducing the figure you end up paying at the end of the loan term.

Some lenders may also have minimum down payment requirements, so do your research and come prepared.

For more tips on getting the best deal on your mortgage, read Elysia Stobbe’s How to Get Approved for the Best Mortgage Without Sticking a Fork in Your Eye

The author provides insights into the different mortgage types, the application process, and how to get affordable loans, making the book an essential read.

FAQs

Now that you know your financing options for modular home financing, let’s answer some frequently asked questions. These will help you better understand the process and make informed decisions.

Can I Buy a Modular Home With Bad Credit?

You can buy a prefab home with bad credit. However, you may need to work with a lender specializing in “subprime” loans or find another way to secure financing.

For example, you can apply for an FHA loan with more lenient credit requirements than conventional loans.

Caveat: If you have bad credit, be prepared to put down a larger down payment and pay a higher interest rate.

To improve your chances of getting approved for a loan, make sure you have your credit score in order and work to improve it.

Here are some things you can do to bump up your score:

  • Pay your bills on time and avoid missed or late payments to demonstrate that you’re responsible with money
  • Reduce your debt by paying off credit cards, avoiding new loans, and not taking on additional debt
  • Keep old accounts open rather than closing them since a long credit history can help boost your score

Here’s an excellent video to watch for tips on improving your credit score:

A screenshot from a YouTube video explaining how to improve your credit score
Courtesy of Bank of America

Can I Get a Regular 30-Year Conventional Fixed-Rate Mortgage?

You can get a regular 30-year conventional fixed-rate mortgage for your modular home. But since prefabs are often considered “specialty” homes, you may have to shop around to find a lender that offers this type of loan.

Note: If you’re having trouble finding a lender that offers a 30-year fixed-rate mortgage for modular homes, you might want to consider an adjustable-rate mortgage (ARM). ARMs typically start with a lower interest rate than fixed-rate mortgages, but the rate can increase over time.

How Much Do You Have To Put Down for a Modular Home?

You may have to put down 5-20% of the purchase price for a modular home. If you have bad credit or are applying for a subprime loan, you may need to put down even more to secure financing.

Still, you may be allowed to put down less than 5-20% if you earn a high income, have substantial assets, or can prove that you’re a low-risk borrower.

Pro Tip: To determine exactly how much you’ll need to put down for your modular home, speak with a lender directly about your specific financing options.

Wrapping Up

Now you know about the best financing options for modular homes. Remember to shop around for a loan that fits your needs and budget and ensure your credit score is in good shape before applying.

Ask your lender if you have any questions about financing a modular home. They’ll help you understand the process and ensure you’re getting the best possible deal.

Happy house hunting!

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