Everything You Need to Know About Chattel 

If you live where the sun always shines, it's essential to know about Chattel Loans. Chattel loans are non-QM loans for borrowers who want to purchase manufactured homes on leased land. The term "leased land" is crucial here, as it indicates that when the land is leased, the property is classified as a movable personal asset rather than real estate. Additionally, if you purchase a manufactured home that is permanently set on a foundation, it is considered real estate, as it is fixed to the land just like any other house.

An example of this type of property is a mobile home in a retirement 55+ park or another type of community park.

In this blog, we will discuss what chattel loans are, how they work, basic qualifications, and the pros and cons of buying chattel property. 

 

 

What is Chattel? 

As stated above, chattel is classified as a movable piece of personal property. These include manufactured homes, modular homes, mobile homes, RVs, and tiny homes, depending on if affixed or not. To further illustrate the point, there are other types of chattel, not just manufactured homes. One of the most common types of chattel is vehicles. A person could use a chattel loan if they are buying a vehicle for business purposes and it's under their business name, versus an auto loan for personal use. 

The second most common type of chattel is equipment. Take a construction business, for example - they may need chattel loans to leverage the trailers and other construction tools they put onsite.

It's essential to recognize that movable property, or "chattel," serves as collateral for the loan. If the borrower fails to make payments, the manufactured home, vehicle, or equipment can be repossessed and sold to settle the debt. Therefore, even though chattel isn't classified as real estate, it should be treated with the same level of seriousness.

 

 

How Chattel Loans Work 

While Chattel is different from secured property, the Chattel loan application process is similar to the conventional loan processes. A loan officer at X2 Mortgage will get to know you and your situation, have you fill out a 1003 application, and start to gather personal and financial documentation from you. 

When it comes to chattel, the terms are more strict and specific than other QM loans due to the risk involved. 

 

Max Debt to Income (DTI)

Because lot fees can change over time, lenders have a stricter DTI ratio for chattel loans–front end at 40.99% and 43%. This means you cannot have more debt payments per your gross income per month capped at 43%.

 

Interest Rates and Terms

Chattel loans come with fixed interest rates that are determined by the borrower’s credit score and the size of the down payment. In all cases, it's important to remember that a higher credit score and a larger down payment can lead to more favorable interest rates and other terms. With chattel, it is possible to have a minimum credit score of 550 and a 5% down payment. 

While chattel interest rates and the annual percentage rate (APR) are higher than traditional loans, the loan terms are shorter, usually ranging from 20-25 years. Although monthly payments may be higher, the shorter repayment period allows for quicker payoff, and there's no requirement for mortgage insurance—though homeowners insurance is still necessary.

In all cases, it's important to remember that a higher credit score, lower DTI, and a larger down payment can lead to more favorable interest rates. 

 

Closing Costs

With chattel loans, you can expect around 5% of the purchase price needed to cover closing costs. Closing costs can sometimes be hard for people to swallow on Chattel Loans. X2 doesn't have any underwriting or processing fees, but there are still closing costs like title fees and origination fees for these loans. Fortunately, appraisals are not required on Chattel loans. Something called a DataComp is used in its place, and it's a type of appraisal that doesn't include the land value. 

 

Leased Lot Fee

Because these properties are on leased land, a borrower not only has to qualify for the purchase price but also has to qualify for the lot fee required from the community they are buying in. For example, a mortgage payment of $110,000 is around $800, but a $700 lot fee is required by the Sunny Days Retirement Community, which owns the land your manufactured home is placed on. So, you have to be able to qualify to pay the lot fee with the mortgage you qualify for, in this example, $1500 per month. 

 

Option to Refinance or Build

You can refinance chattel loans after 12 payments, but you cannot get cash out. A borrower can own the chattel property, but what if they want to move it? There is an option to buy land elsewhere and have the chattel placed upon it, or do renovation work if they would like. One would question the chattel definition because the property is no longer on leased land, but the asset still wouldn’t be affixed, which is why it would still be a chattel loan. 

 

Property type

After primary homes, chattel loans are commonly bought as vacation or second homes, which is very popular here in Arizona as well as Florida. Someone has to have owner-occupied real estate to qualify for a vacation or second home. 

 

Advantages of Chattel Loans 

If you are a first-time home buyer, chattel Loans are a great way to get your foot in the door in the real estate world. Now that you know what chattel is, you know it's not traditional real estate, but you get in the real estate game–you are not paying rent towards someone else, you are starting to pay yourself and own an asset. With lower purchase prices, chattel loans make home ownership closer than they think. 

Chattel offers opportunities for those who want a community. Many people have dreams of becoming snowbirds, leaving their primary residence, and going to warmer climates during the bitter cold. Chattel loans make this very possible for 55+ borrowers to live in a community with tons of amenities at a great price. 

 

 

Disadvantages of Chattel Loans 

The two most common disadvantages reported are the limited types of property that are considered chattel, and the collateral depreciation. 

Due to the tricky nature of these homes, some real estate agents have a hard time determining if a manufactured home is a chattel property or not. Usually, there will be hud plates on the property, and this will prove that they are chattel. Also, usually finding a home that was built before 1976 will NOT qualify. 

Chattel homes do not appreciate like normal real estate, because they aren't structurally built to last like other stationary homes. Another way to think about this is like a car, they don't hold their value as well as a home. However, it's important to think about the housing market that you are buying in, as here in Arizona, they sell very often. 

 

 

Comparison to other Financing options

While Chattel loan is very doable for many people, there are other options to consider to see what best works for your situation. Please don't hesitate to reach out to an X2 Mortgage professional to help you decide what is best for your situation. 

FHA loans have low interest rates, and lower credit scores needed to qualify, a minimum of 500, but you will need to put down 10%. If you have a 580 credit score, you only have to put down 3.5%. If you can afford the purchase price, this may be a good option to consider. 

Chattel loans do not take into account our Veteran Borrowers, so they cannot use their benefits towards chattel property. 

If you find a modular/mobile home that is secured, Conventional loans cover these. The key is that they are affixed and not on leased land, even if the collateral is different from a traditional home. 

USDA does take manufactured homes, the borrower and agent will need to check if the land is leased or not. 

 

 

Practical Examples: Deciding on a Chattel Loan 

Barbara and Tom have a home up in Idaho but are tired of the snow. They are about to retire but don't want to leave their grandbabies full-time. They have some friends who moved to Arizona in a small retirement community and love all the amenities and fun they are having with people they've met around the country. 

Barbara and Tom have a good credit score and interest rates and only some car payments.  After finding a home built in 2000, with a lot lease of $700, they easily qualified with their debt to income. They found a second home and lived in the sun from November through April and are very happy to have found chattel loans. 

Monica is a single mom and is sick of paying rent. She has worked hard paying down credit cards and has increased her credit score over the past six months. She also has put money away to put towards a down payment. While she likes a townhome, the purchase price is out of reach. While she was looking online, she found a mobile home community for families. Included in her lot lease are water and trash, and even a pool and gym membership. Annie easily qualified for a chattel loan and is happy to start owning property, even if this isn’t her forever home. She plans to live here for a few years, do some upgrades, and sell to get into a traditional dream home. 

 

Chattel Loans Open Up Doors-Literally. 

Chattel loans offer a unique and accessible pathway for individuals looking to invest in manufactured homes. While chattel loans present certain challenges, such as limited property types and potential depreciation, the benefits—like lower costs and flexible terms—make them an appealing option for first-time buyers and retirees seeking a community lifestyle. If you’re ready to explore the possibilities of owning a chattel property, don’t hesitate to reach out to our team at X2 Mortgage. We’re here to guide you through the process and help you secure the financing you need to make your dream home a reality.

 

Contact us today to learn more about chattel loans and take the first step toward owning your piece of paradise!