With inventory at an historic low, many home buyers are ditching the market and building their own homes. For many, modular homes are the ideal solution, offering a quick build time and a more affordable price tag.
But financing any new home construction is more complicated than buying an existing home. If you’re considering building a modular home, it’s important to understand your options and how the process works.
Two Loan Options: Construction and Construction to Permanent
When building a home, you have two options when it comes to loans: construction and construction to permanent.
Construction loans provide financing for the construction of the home. Once that is complete, buyers must refinance the property with a permanent loan to pay off the construction loan as well as any other existing liens. With this type of financing, you’ll have to deal with two closings.
With a construction to permanent loan, buyers obtain one loan and only have to deal with one closing. The loan covers the construction of the home, and once that is complete, it automatically converts to a permanent loan.
Most buyers choose a construction to permanent loan because it’s more convenient and allows them to avoid the hassle of dealing with two closings.
How to Get Financing for Your Modular Construction
If you’re ready to build a modular home, you may be wondering how the financing process works. Let’s assume that you’re applying for a construction to permanent loan.
The first step is to get pre-qualified. This will give you an idea of how much money you have to work with.
It takes just a few minutes to get pre-qualified over the phone, but keep in mind that this not a guaranteed approval. Pre-qualification is based on estimates for your income, credit score and debt payments.
Getting pre-qualified will give you a starting point so that you can find a modular home that will fit in your budget. While not a guaranteed approval, if you’re honest about the information, you should have few issues in getting approved.
Once you’ve found a modular home that you like, you will need to complete a contract for purchase from the builder. At this point, you can apply for a mortgage.
When applying, you’ll want to have the following documents on hand:
- Financial documents, including W-2s for the last two years
- Two months of pay stubs from your employer
- Bank statements from the last two months
- Billing statements for open loans
At this time, you will be presented with disclosures and other documents. Upon signing the application, the lender will also obtain a detailed credit report.
Once your application and documentation has been submitted, it will be reviewed by a mortgage underwriter.
If approved, you will receive a “commitment letter” which states the approved loan amount and conditions that must be met prior to closing.
Once approved, you will be required to submit the following:
- A copy of the deed to your lot (if owned), or a sales agreement for the property if you are purchasing it.
- A detailed set of plans outlining the layout and design of the modular home. The plans are required when ordering an appraisal, which will determine the fair market value of your home.
- A signed contract between you and the general contractor detailing the costs of labor and materials.
Once the mortgage is approved, a disbursement schedule will be created, you will close on the loan, and construction of the home can begin. Inspections will be made before each disbursement. The loan will automatically convert to a permanent mortgage once the home construction is complete.
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