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CHATTEL AND MOBILE HOME FINANCING WITHOUT THE LOT
What are chattel loans? From my understanding chattel loans are similar to a mobile home without ownership of the lot. I was told Barno Miniums are Chattels. How does financing for chattels work where the owner does not have ownership of the property and the property owner charges lot rent. Usually, lot rent includes property taxes, snow plowing, water, electric, sewer and septic if applicable. Lot rents is not cheap. It can be $700 to $1,000 per month.
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A chattel loan is a type of financing that is secured by movable property rather than real estate. In a housing loan, chattel financing means the lender’s security is the home (i.e., a manufactured or mobile home built to be moved) rather than the land on which the home is sited. When a home is not legally affixed and not legally part of the real estate, it is a piece of personal property. In that case, a lender may provide financing in the form of a chattel mortgage. In a chattel mortgage, if the borrower defaults, the lender has the right to repossess the home; the lender cannot foreclose on the land.
For barndominiums and similar home designs, whether chattel financing or financing as real property is used primarily depends on how the home is affixed and how it is titled. If the home is sited on land owned by the borrower and is permanently affixed, it is typically financed with a real estate mortgage. If the home is treated as personal property and is on a leased parcel, several lenders may offer financing as a chattel loan. In this situation, only the structure may be used as collateral, while the land is excluded. When it is said that “these units are chattels,” it means the units are treated as personal property and require chattel financing, as opposed to traditional land-and-home financing.
Chattel loans differ from conventional mortgages when land ownership is absent. In these cases, the home or structure, along with attached improvements, serves as the sole collateral. Rather than county land records, the lender secures their lien with the appropriate personal property or titling registrar. Chattel loans, like personal installment loans, also have fixed rates and, in the manufactured housing space, generally have shorter amortization periods and higher interest rates than other mortgages. The lender sets the underwriting criteria and, while they differ from agency mortgage lending, have more in common with auto and RV loans. The income documentation is often comparable to that used in mortgage underwriting.
The land element is introduced as a lease with the landowner or the park. The borrower executes a land or pad lease that contains lot rent, term, and park rules. The chattel lender typically requires a lease with an adequate remaining term and may assess the park’s stability and requirements, as losing the site could negatively affect the collateral. Lot rent is also handled separately from the loan payment, much like ground rent or an HOA fee under a traditional mortgage. Lot rent is, in fact, a housing cost. Lot rent is paid to the landowner or park to occupy the lot, and nonpayment of lot rent allows the lender to reclaim the collateral even if the loan is in good standing.
The total monthly housing cost includes several factors from the borrower’s perspective. First is the chattel principal and interest payment. Second is home insurance, which may be held in escrow or paid directly. Third is lot rent, which is high in many parks, with many markets seeing lot rents in the $700-$1,000 range. Lot rent may also cover property taxes, park property owner costs, water, snow removal, sewer, trash, and other common services. Lot rent, water, and other common services can be considered utilities. These costs are part of the borrower’s total monthly housing payment. Lot rent, insurance, and utilities may make the total monthly housing payment appear to be a PITI payment for a stick-built residence, even though the home’s loan amount is smaller.
Both parties in this scenario assume unique risks. The borrower regards lot rent as a pure cost that may increase in a lease renegotiation. The borrower gains no equity in the lot. For the lender, if the borrower is evicted or the lease is terminated, the lender has a problem on their hands, given that the home may need to be relocated, a costly process, or even impossible if the home is an older unit. The lender may also have a loss of equity if the home cannot be relocated. The risk of having to relocate the home is one reason the cost of a chattel loan is higher than that of a traditional loan, and it is also why lenders conduct extensive due diligence in examining the park rules and lease terms.
In comparison, for borrowers who own both the home and the land it sits on and therefore have titled the property as real estate, the financing is likely to be a conventional mortgage, in which a deed of trust or mortgage is filed with the county land records. Here, the collateral is the land and improvements, with a 30-year term and a rate based on the real estate mortgage market. For the housing costs, the principal, interest, property taxes, and insurance are based on the real estate, with the HOA or ground rent paid in addition. In the chattel situation you are inquiring about, the borrower’s equity is in the building, with financing for the building only; the cost of the land is paid as a separate lot rent and is not financed or included in the loan payment.
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