Modular homes offer a great deal of flexibility for potential homeowners. Generally, these residences are modules, prefabricated remotely and arranged on-site according to a predetermined configuration. Financing a modular home is possible through a construction loan which is different from a typical mortgage. Here’s what you should know.
Understanding Construction Loans
Generally, construction loans come with higher interest rates than most home mortgages. A construction loan is really a line of credit that covers a pre-determined cost of construction which includes the following:
- Price of the lot
- Cost of the modular home
- Labor and materials for completion
- Permitting costs
- Legal fees
In some cases, a lender may also cover the interest you pay during construction and additional costs due to overruns. After construction is complete, your line of credit balance is converted to a typical home mortgage. Please note that you’ll have to secure other financing for pre-construction of your modular home. This phase includes site testing, blueprint creation and a site development plan which need to be approved by your local zoning board before your construction line of credit becomes available.
Receiving Construction Loan Disbursements
Before you can receive funds to pay for construction, the lender will have someone inspect your home at various phases. If your property passes inspection, payments will be sent to the builders, vendors and subcontractors as appropriate. Be aware that you may have to pay an extra fee for each disbursement exceeding the amount in your original construction loan agreement.
Getting Approved for a Construction Loan
You may be expected to put some money down to get a construction loan. This is especially true if you are applying for a large sum of money or don’t own the lot on which your home will be built. In any scenario, it’s important to check as some lenders may still cover 100% of your loan without lot ownership.
Establishing a budget for construction of modular homes is very important. Asking for additional features, also known as scope creep, can ruin your budget and schedule, leading to complications when qualifying for a construction loan.