Looking to buy a manufactured home, a boat, or a piece of equipment for your business? You may need a chattel mortgage.
Chattel mortgages are used to finance movable assets separately from the land they occupy. They come with a higher cost than a traditional mortgage, so manufactured home dwellers who qualify for a standard mortgage will save money by choosing that route.
Here’s what you need to know about how chattel loans work and when you might want to look for alternative financing.
What Is a Chattel Mortgage?
First of all, a chattel mortgage is used for personal property, not real property. Real property includes land and property that cannot be easily removed from the land.
When a chattel mortgage is used for a large, movable asset like a manufactured home — called a mobile home before June 15, 1976 — or a piece of equipment (the “chattel”), the asset is held as collateral on the loan. If the borrower defaults on the loan, the lender can recoup costs by selling the asset.
A chattel loan may have a lower interest rate than an unsecured personal loan but a higher rate than a traditional mortgage.
Note: SoFi does not offer chattel mortgages at this time. However, SoFi does offer conventional loan options.
How Does a Chattel Mortgage Work?
Chattel mortgages are used in two main instances: when an asset can be moved or when the land the asset sits on, or will, is leased. (In fewer cases, a chattel loan may be used when a borrower doesn’t want to encumber their owned land with a loan, as when land is owned jointly in a trust.)
Applying for a chattel loan is similar to applying for other types of loans, such as home equity loans and personal loans. The lender will look at your creditworthiness and ability to repay the loan before making a decision.
Chattel loans are typically small, with relatively short terms, but usually require no appraisal, title policy, survey, or doc stamps (the documentary stamp triggers a tax in certain states).
Recommended: First-Time Homebuyer Guide
What Are Chattel Loans Used For?
Here are some of the most common applications for chattel loans.
Manufactured Homes
Manufactured homes are built in a factory on a permanent chassis and can be transported in one or more sections. Formerly known as mobile homes, they’re designed to be used with or without a permanent foundation, but must be elevated and secured to resist flooding, floatation, collapse, or lateral movement.
Many are titled as personal property. Manufactured housing that is titled as personal property or chattel is only eligible for chattel financing.
When a manufactured home is titled as chattel, you’re also going to pay vehicle taxes to the Department of Motor Vehicles instead of property taxes.
Many consumers may encounter a chattel loan at the sales office of a manufactured home builder. They’re convenient with quick closing times, but come with a higher interest rate and a shorter term than most traditional mortgages.
This makes the financing cost of the manufactured home high, even if the payment is low thanks to the lower cost of a manufactured home compared with a site-built home. Around 42% of loans for manufactured homes are chattel loans, according to the Consumer Finance Protection Bureau.
When you own a manufactured home and rent the land it occupies, such as in a mobile home park, you will need a chattel mortgage, except when an FHA Title I loan is used.
Tiny Houses
A chattel mortgage may be used for tiny house financing when the tiny house is not affixed to a permanent foundation and/or when the land is leased.
Tiny houses are usually too small to meet building codes for a residential home, so even if the home is on a foundation and on owned land, a traditional mortgage is almost always out of the question. Even if Fannie Mae or FHA allows the property, the lender won’t.
Tiny houses on foundations are usually classified as accessory dwelling units.
Vehicles
A chattel loan may finance assets that are not permanently affixed to the property, such as vehicles. Dump trucks and construction vehicles may qualify.
Equipment
A chattel loan can be used to purchase large equipment for a business, such as a forklift or a tractor. Even livestock can be purchased with a chattel loan.
How Much Does a Chattel Mortgage Cost?
Chattel mortgages are more expensive than many other different mortgage types. The Urban Institute concluded that chattel loans were substantially more expensive than non-chattel loans. Owners of manufactured homes would spend thousands more per year in interest compared with a traditional mortgage.
These types of mortgages are not being purchased by Fannie Mae or Freddie Mac on the secondary mortgage market. When a conventional mortgage is purchased by one of these entities, the loan originator obtains more liquidity and can provide more loans to more people. This drives the cost of the mortgage down.
A chattel mortgage, on the other hand, must stay on the books of the lender, making the loan riskier and more expensive.
If you qualify, you might want to consider refinancing your chattel mortgage into a traditional mortgage.
Recommended: Home Loan Help Center
Chattel Mortgage vs Traditional Mortgage
To qualify for a conventional or government-backed mortgage instead of a chattel mortgage, you must own the land your home sits on, the home must be permanently affixed to a foundation, and it must have at least 400 square feet of living space (600 for Fannie Mae’s conventional loan for manufactured homes).
Mobile homes built before June 15, 1976, will not qualify for a mortgage loan. A personal loan is about the only option.
You must also meet all other requirements set forth by the lender to qualify for a traditional mortgage. A mortgage calculator tool can help with this.
For some types of assets, a chattel mortgage may be a good option to consider. Take a look at the major differences.
| Chattel Loan | Traditional Mortgage |
|---|---|
| For movable property only | Includes the land and all attached structures |
| May have a lower interest rate than an unsecured personal loan | Usually has a lower interest rate than a chattel mortgage |
| Shorter terms (e.g., 5 years) | Longer terms (e.g., 15 years, 30 years) |
| Lower origination fees | Higher loan fees |
| Shorter close time | Longer close time |
| Lender holds the title, which is only given to the buyer when it is paid off | Lender holds a lien on the property, not title |
Pros and Cons of a Chattel Mortgage
A chattel mortgage is more expensive than a traditional mortgage, so anyone who can qualify for a traditional mortgage may wish to pursue that option first. It’s not all bad news for chattel mortgages, though, especially for other types of property where a chattel loan is desirable.
| Pros | Cons |
|---|---|
| Lender only has a security interest in the movable property, not the land | If you default on the loan, the lender can take your asset. Also, the lender owns the asset until the loan is paid off |
| Taxes may be lower on property titled as “chattel” rather than “real” property | Higher-cost loan than a traditional mortgage |
| Possible faster close and lower loan fees than a standard mortgage | Fewer consumer protections. Chattel loans are not covered by the Real Estate Settlement Procedures Act or CARES Act |
| Lower interest rate than a personal loan | Higher interest rate than a traditional mortgage |
| Pays down more quickly than a traditional mortgage | Shorter term may create higher payments |
| Interest paid is tax deductible | Interest paid is also tax deductible with a traditional mortgage |
Consumer Protection and Chattel Mortgages
Chattel mortgages on manufactured homes are a special concern to the Consumer Financial Protection Bureau because that type of housing:
• Serves an important role in low-income housing
• Is typically taken on by financially vulnerable people
• Has fewer consumer protections
Manufactured home sellers often have an on-site lender where borrowers can walk away with a chattel loan the same day as the home purchase. In certain scenarios, though, better financing options might be available.
The Takeaway
Buying a manufactured home or a piece of heavy equipment? A chattel loan could be the answer. If, though, you are buying a manufactured home and own the land, a traditional mortgage makes more sense than a chattel mortgage.
FAQ
Where can I get a chattel loan?
Lenders specializing in chattel or manufactured housing loans will offer this type of loan.
How much does a chattel mortgage cost?
The interest rate of a chattel mortgage could be several percentage points higher than that of a standard mortgage loan.
What happens at the end of a chattel mortgage?
When a chattel mortgage is paid off, the borrower receives legal title to the property or asset borrowed against. It’s also possible for landowners with permanently affixed manufactured homes to refinance into a traditional mortgage to end their chattel loans.
Is a chattel mortgage tax deductible?
A chattel mortgage qualifies for the same tax deductions that a traditional mortgage does. This includes a deduction on mortgage interest paid throughout the tax year.
Photo credit: iStock/MicroStockHub
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