If you’re buying movable property, did you know that you need a different type of mortgage (a chattel mortgage)?
This often becomes confusing for buyers when they decide to buy manufactured homes, modular homes, vehicles, or other types of equipment.
In this blog, we’ll tell you everything you need to know about getting a chattel mortgage to buy this type of property.
1. What is a chattel mortgage?
A chattel mortgage is a loan used to purchase an item of movable personal property, like a manufactured home or a piece of construction equipment.
The chattel, or the moveable property, secures the loan.
The loan is secured; thus, if you default on the loan, the lender can take possession of the item or property.
2. How is a chattel mortgage different than a traditional mortgage?
The primary difference between these two types of mortgages is that a chattel mortgage is used for movable property while a traditional mortgage is used for stationary homes.
A chattel mortgage is typically used only for movable property, but not the land it sits on.
On the other hand, traditional mortgages include both a home and the space where it resides.
When you get a chattel mortgage for the movable property, you must own, rent, or buy land unless the lender includes land rental costs in your loan payment.
Other differences between chattel mortgages and traditional mortgages include shorter terms, lower processing fees, and lower maximum loan amounts.
Chattel mortgages also tend to have a higher APR and interest rates.
So, be prepared to have high monthly payments.
The good news is that you’ll be able to pay off your loan faster.
3. What are the different types of chattel mortgages?
Manufactured home loans
Chattel mortgages are often used to finance manufactured homes (also known as mobile homes) that sit on leased land.
A traditional mortgage isn’t an option in these cases because the land doesn’t belong to the homeowner.
Because the manufactured home is considered “personal movable property,” it can serve as security for a chattel mortgage.
Modular home loans
Modular homes are like manufactured homes, but they are less mobile as they are normally placed on a permanent foundation.
They aren’t typically moved after being placed.
Because modular homes are fixed, you can finance them with a traditional mortgage as well.
Keep in mind that they must follow the same local building codes as traditional housing.
Equipment loans
Consider taking out a chattel loan on heavy equipment like tractors, forklifts, and other similar machinery.
Farming equipment is a sensible way to use a chattel mortgage because it will be put to use immediately and used to generate funds to pay back the loan.
Vehicle loans
A chattel loan can also secure a car or vehicle.
Why not use an auto loan?
In most cases, when people use a chattel loan for a vehicle, it’s for business purposes.
This route is more popular in countries that have GST — goods and services tax — because the borrower may claim a tax credit on the interest of the loan.
4. What are the advantages of a chattel loan?
Are you still wondering why anyone would bother with a chattel loan when there are conventional loans?
Here are some of the benefits that chattel loans offer.
Monthly mortgage payments are structured similarly to conventional mortgage payments
Chattel loans normally have lower processing fees than conventional mortgages
The loan interest on chattel loans may be tax-deductible (although, this does vary)
The interest rates on chattel loans are lower than those associated with unsecured loans
Most chattel loans don’t last longer than 23 years, which is a term shorter than a conventional mortgage
5. What are the disadvantages of a chattel mortgage?
In general, these mortgages have fewer consumer protections, which makes them riskier.
For example, in Australia, chattel mortgages aren’t regulated by the National Consumer Credit Protection Act (NCCP Act).
To protect yourself, you should fully understand the terms and conditions associated with the mortgage before taking it on.
If you’re unable to make repayments, then there’s a risk that your property could be repossessed.
Another disadvantage of this mortgage is that it comes with a higher interest rate than conventional mortgages.
This makes borrowing money more expensive for individuals and businesses.
Additionally, depending on what you take out a chattel mortgage for, you may have to pay for the maintenance of that property.
This can also raise your costs.
6. How do you qualify for a chattel loan?
Here are the general guidelines (from Cascade Loans) for qualification.
However, these can change so check with your lender!
Minimum FICO score of 575
Minimum loan amount of $35,000
Maximum loan amount of $125,000
New single or multi-section manufactured homes are eligible for chattel loans
As little as 5 percent down
As much as 50 percent debt-to-income ratio
20-to-23-year terms
Keep in mind that loans with a qualifying FICO score of less than 600 are typically subject to additional guidelines and requirements.
The higher your credit score, the better position you’ll be in.
Additionally, a 5 percent down payment is subject to additional minimum FICO and residual income requirements.
Talk to a loan officer to understand all further requirements.
Here are some additional requirements for chattel loans.
You cannot have any repossessions on auto loans within the last 24 months.
You cannot have a collection account greater than $1,000 opened within the last 12 months.
If you have any active past due accounts, you must pay them prior to receiving the loan.
You cannot have any disputed accounts with a cumulative balance greater than $3,000, or this may result in the rejection of your loan application.
A residual income test applies to all loans and is stricter for lower credit and higher DTI ratios.
7. If you don’t currently qualify for a chattel loan, how can you qualify in the future?
Typically, chattel loans are available through businesses directly.
You can reach out to them if you have any questions about qualifications.
That said, the following steps can help you to improve your chances of getting approved.
Check your credit report
Credit is an important part of the application process for any type of financing.
When you have a good credit report, you’re more likely to get approved for a loan and obtain a low-interest rate.
If you haven’t already, take a look at your credit report.
If your credit score isn’t as high as you need it to be, start building your credit.
You can do this by making payments on time, lowering your credit utilization, and paying off debt.
Determine if you’re purchasing land
How are you handling the land where the property will be kept?
Are you renting it or buying it?
Depending on what you decide, you may have fewer loan options which is helpful to know.
Understand the purchase you’re making
The item you’re purchasing (manufactured home, tractor, etc.) can affect the loan amount.
It’s helpful to get specific on what you’re buying before applying for the loan.
When you’ve completed the steps above, you can submit your application and secure your down payment (if necessary).
8. What are the tax implications of a chattel mortgage?
Similar to the interest paid on a traditional mortgage, the interest paid on a chattel mortgage can be tax-deductible up to a certain amount.
9. What is an example of a chattel loan?
As noted above, manufactured homes, vehicles, airplanes, boats, and farm equipment are all common examples of assets financed with a chattel loan.
The Consumer Financial Protection Bureau states that about 42 percent of the loans used to purchase manufactured homes are chattel loans.
If you’re interested in using a chattel loan, you’ll want to understand the specific rules tied to them.
These rules often vary depending on the type of property you’re purchasing as well as the state and federal laws.
Take Florida, for example.
Florida requires that chattel loans are registered in a public registry.
This way, third parties are aware of them before they enter into financial agreements with potential borrowers who want to put up property as security for another loan.
10. Who should use a chattel mortgage?
Chattel mortgages are a good option for those looking to finance a manufactured home or heavy equipment for their business.
These loans are smaller than traditional loans and tend to have higher rates.
However, they are shorter in term which means you can pay them off more quickly than conventional loans.
Before you decide whether this is the right loan for you, chat with a dedicated mortgage consultant.
They can confirm if this is the best way to purchase your manufactured home, vehicle, or equipment.
11. What are the alternatives to a chattel mortgage?
A chattel mortgage is not for everyone because they pose more risks for consumers and have stricter requirements.
In some cases, a government-secured loan or personal loan may make more sense.
The FHA (Federal Housing Administration) offers mortgages with looser requirements.
They do not lend money but instead insure the loan and work with companies that lend to eligible buyers.
If you’re not qualifying for a conventional mortgage, this can be a good route.
The approval process isn’t as rigid.
Applicants with lower credit scores and smaller down payments may find this to be a better option.
This route is typically more amenable because the loan is government-guaranteed and more secure than a chattel mortgage.
On the other hand, personal loans can also be a good route if you’re able to qualify.
If you’re intending to purchase a manufactured home with a personal loan, this can make a lot of sense.
Here are the main advantages of a personal loan.
Personal loans aren’t secured by your home, so a lender can’t foreclose on it
Personal loans don’t include closing costs
Personal loans give you money in a matter of days not weeks
Still, with personal loans, you’ll need to abide by your lender’s income and credit requirements and deal with higher interest rates.
You should consider all your options before deciding the best route for your situation.
12. Can you pay off a chattel mortgage early?
Yes, you can.
That said, just like regular real estate mortgages, there can be penalties or fees associated with paying the loan off early.
If you’re considering paying your chattel mortgage off early, you should check with various lenders to see how this would work before you even secure the loan.
Do your research.
While penalties or fees can deter you from paying off a mortgage early (as they’re intended to), don’t let them deter you from an early release.
Often, you can save enough on future interest payments that it makes sense to pay these fees.
Because chattel mortgages come with higher interest rates, they’ll end up costing you more in the long run.
So do the math — it’s likely that the sooner you pay it off the better!
13. What happens at the end of a chattel mortgage?
When you’ve reached the end of a chattel mortgage loan term, the buyer has paid the loan off and owns the property.
Final Thoughts
If you’re interested in owning a piece of movable property, then a chattel mortgage can be a great option for financing.
However, it isn’t always the best option for everyone, so we recommend talking to a loan officer to discuss all your choices before moving forward.
Chattel mortgages carry more risks like higher interest rates and the potential for the property to be repossessed if you don’t fulfill the terms of your loans.
Additionally, you’ll need to make sure that your credit score and income align with the requirements to apply.
Additional Resources
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Disclaimer: we are not lawyers, accountants, or financial advisors and the information in this article is for informational purposes only. This article is based on our research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.