Disadvantages of Manufactured Home Loans

Manufactured home loans generally apply to purchases of mobile or modular homes. They can assist you in purchasing the property in the same way an auto loan helps you buy a car. Since the loan limits are not as high as a mortgage, manufactured home loans are typically easier to secure for those with a low asset base or less than perfect credit. However, before jumping at the opportunity, it is important to consider the many disadvantages of these loans as well.

Higher Interest Rates than Mortgages

Manufactured home loans will typically be extended at a higher interest rate than mortgage loans. There are a few reasons for this difference. First, most individuals purchasing a manufactured home have a lower credit score or lower income than individuals purchasing a permanent structure. Whenever a borrower has bad credit and a low income, the loan qualifies as high-risk to the lender, making it more expensive to the borrower. 

Further, manufactured homes typically decrease in value over time. While a permanent home is typically assumed to grow as an asset, a mobile home is more similar to a car that loses value once it has been used. Because the asset will not be worth as much in the future, the lender may lose money if they have to seize and liquidate the asset. The lender has to assume a higher interest rate to attempt to cover any loss if the loan is not paid off. 

High-Risk to Borrower

Most manufactured home loans must be secured. Especially if you are looking for an interest-only loan, you will need to collateralize the home itself in most cases to secure the financing. The lender will continue to hold the title to the home while you pay off the loan. You will only own the title once the loan has been paid off. If you default, the asset can be seized and liquidated by the lender.

When the asset is liquidated, you may still owe money on the loan if the sale price does not pay for the remainder of what you owe. This is a particular risk for mobile homes because they can decrease in value. One tip in this case is to attempt to secure a non-recourse loan. A non-recourse loan means the lender will have to simply assume any losses if the seized asset does not pay off the loan.

Debt to Asset Ratio

Building wealth is important in planning for your financial future. Mobile and modular homes, though they are assets, are not typically as strong over time as permanent homes. If you are looking to truly build an asset base instead of just taking on debt, you should consider what it will take for you to finance the purchase of a home. This may mean making sacrifices to afford higher monthly payments or waiting a few years to be able to make the down payment. However, the cost of the loan will be much less and the value of the asset will be much greater.