Industry Professional Tips: Jed Lowman – Chattel Loan Denials

What do you do for a customer who can’t qualify for chattel financing?  They’ve picked out the home; they’ve been approved by the park, but every major chattel lender has turned them down – Why?  Maybe the customer doesn’t have a large enough down payment. Maybe the customer’s credit scores are below 640 with a short credit history.  Maybe the customer’s income cannot work within the relatively more stringent world of chattel loan income requirements. What do you do? If you’re a retailer or builder, do you just let the customer walk away with broken dreams of a new home for their family?  If you’re a Realtor, do you advise the customer to work on their credit, pay off debts, put together gifts from family members, etc.? I think that there may be another option.

Here’s a great example for a customer in Benton County, Oregon who wants to purchase a manufactured home in a community for $165,000. With decent credit, on a chattel loan, the customer would probably be paying a 7-8% interest rate over 20 years and be required to put down at least 5%.  For our example, we will use 7.5% as our interest rate and 5% as our down payment. Lot rent could be conservatively estimated at around $500/month. The customer’s total monthly housing obligations would look something like this:

Chattel Loan

Principal and interest                       $1,285.00

Taxes                                                    $65.00

Insurance                                             $70.00

Lot Rent                                               $500.00

Total                                                  $1,920.00

Let’s say that the customer earns a gross income of $5,000 and they have other monthly credit obligations (car loan and student loan) of $700/month.  A lender would calculate the customer’s income ratio to be 38 (housing debt ratio)/52 (total debt ratio). Except for subprime lenders, these ratios are too high for a chattel loan. What happens to this customer?  Can they still get a new manufactured home? Here’s where it gets interesting:

Would it be possible to build the same home on private property or locate an existing home for relatively the same monthly payment and down payment?  Yes, I believe it is. Real property loans (insured by Fannie, Freddie, FHA, and VA) offer the benefits of longer terms and lower interest rates. Down payment requirements on these manufactured home loans typically range from 0-5%.  For our example, let’s assume that the customer is using an FHA loan to either build a new manufactured home or purchase an existing manufactured home on real property for $250,000. They will be putting 3.5% down on a 30-year loan at 5.75%.  On a monthly basis, the customer’s payments would look a little something like this:

FHA Loan

Principal and interest:                      $1,433.00

Taxes:                                                   $250.00

Insurance:                                            $100.00

Mortgage Insurance:                         $160.00

Total:                                                $1,943.00

Using the same formula for debt-to-income that we used on our chattel loan example, the customer would now have income ratios of 39/53 – This loan would almost certainly be approved as an FHA deal.

Don’t get me wrong, I wholly acknowledge the importance of chattel loans and I completely understand why a customer would prefer to live in a community vs. a home on private land.  If you have any questions, feel free to reach out to ManufacturedHome.Loan’s team!

Jed Lowman is a ten year veteran of the manufactured/modular home financing industry. He specializes in Conventional, FHA, and VA new construction-to-permanent lending for manufactured, modular, and traditional site-built housing. Recognized by his peers as a nationwide leader in the new construction space, Jed works on primarily FHA, VA, and Conventional One-time Close Construction Loans, purchase money end loans, and FHA/VA renovation loans. Jed works closely with builders, retailers, and realtors to ensure the smoothest and most pleasant experience possible for all of his customers. When not at work, Jed enjoys spending time with his family, hanging at the beach, and rooting for his beloved Baltimore Orioles.
Jed can be reached at 949-576-2165.

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