FINANCING FOR MANUFACTURED HOMES, TIPS, WHY SO CHALLENGING AND MORE.
First please know, obtaining financing for any home with today’s lending laws can be frustrating and it just takes time. The Dodd/Frank Act of 2010 dramatically increased time for home loans and often time creates frustration for consumers, retailers and lenders.
We, Mid-State Mfg. Housing, Corp., are not lenders. We do not receive kickbacks, interest money or other financial incentives from lenders. What the lender offers you, is what they offer you. The only benefit we get, is that some lenders are easier to work with than others. None of the lenders we do business with charge a pre-payment penalty or early payoff penalty.
In a nut shell the Dodd / Frank Act of 2010 created the CFPB (The Consumer Financial Protection Bureau), changed how the lenders offer terms, created laws and regulations specifically directed at home loans. If a lender violates these regulations or laws, they can be subject to large fines and other penalties issued by the CFPB. Lender are audited on a regular basis. Lenders must treat everyone equally and use, what I call, a bracket/box method of offering terms. For example:
This credit score, with this much down payment, buying this type of house, going on this type of location equals this interest rate. Once you fit in that box, those are the terms offered.
We often times find ourselves defending our lenders and explaining to our customers why the lenders are asking for the same item multiple times or answer questions why they are requesting so much information.
Remember or at least try and remember if things become frustrating…the lender and underwriter or loan originator WANT to offer you and close a loan for you! After all, this is how they earn their living. They want to say yes, but sometimes the laws and lender policies require them to say no.
Once you are offered loan terms, typically called a “Pre-Approval” and you decide to go with that lender, there is a detailed list of items the lender will require before you can close. These are typically called stips or conditions. Most of the time you are emailed this list. We recommend using it as a checklist, keep those items in order as you obtain them and bring them to the retailer for help processing to the lender.
The faster, the more organized and more detailed you are directly equates to how fast you close and get your home! Customers/borrowers who are on top of it, typically close 3-4 weeks faster than those who drag their feet or are delayed in getting in all the required conditions.
Some types of loans offered today are as follows:
Chattel Loan – a new or used home only loan.
Land in Lieu – a borrower uses land they own or will be given, in lieu of making a cash down payment.
Land & Home – a borrower is buying both land and home at the same time.
Equity Buy Loans – can be chattel or land & home. This program requires 35% down in the form or land, cash of a combination thereof. Typically for those with very challenged credit scores or history.
Government backed loans:
USDA Loan – involves land and a new home. A government loan program.
VA Loan – fopr prior service or veteran borrowers
FHA Loans – involves land and new or used homes.
Here are a few items which seem to come up a lot during conversations with our customers when financing a home.
Ability to re-pay the loan:
A lender is required to prove the ability to repay the loan as set by lending regulations. Most of the time this is done with a pay stub, W-2, tax returns or another source documentation. As the loan process goes on, updated pay stubs “updated prove ability to repay” will be required until you get to closing and in some cases even after closing. If you can’t budget to re-pay the loan, according to the lending laws, the lender can not legally offer you a loan or close on your loan.
Source of down payment:
A lender must source where your down payment came from. Letters of explanation help, but in most cased Lenders like to see bank statements of where the money came from. Bank statements need your name, account number and must include ALL pages. If a screen shot from on-line banking, this must still include your name and account number as well as certified by your financial institution. Policies differ lender to lender so be sure and ask your retailer or lender what they will need.
Good to know - If someone is gifting you the down payment, they must provide the source as well.
Debt to Income Ratio:
Most lenders use 43% to 50% debt to income ratio to calculate how much of a monthly house payment you can afford, as written in the lending laws. You can calculate your debt to income ratio as follows:
Gross monthly income (include all parties applying for the loan) x 43% then subtract out credit card payments, car payments, student loans, mortgage payments, child support, etc. Utilities, insurance, groceries, fuel, etc. are not figured in debt to income ratios. Here is a quick example:
A person makes $45,000 a year.
$45,000 / 12 months = $3,750 a month of gross income.
$3,750 X 43% = $1,612.50
($350) less monthly car payment.
($50) credit card monthly payment.
($285) ATV payment
$930.50 is what your max monthly house payment can be, including annual property tax and hazardous insurance, which are almost always escrowed into your monthly payment.
The better the score, the better the terms a lender will offer you, such as a lower down payment requirement and/ or a lower interest rate. In our experience Credit Karma is not an accurate depiction of what you will score with a lender. Some lenders only use one credit reporting source, but most use a combination of all 3 bureaus. Transunion, Equifax and Experian are the 3 most used bureaus. Lender policies vary, lender to lender.
Self Employed / 1099 Income:
If you are self-employed and applying for a home loan, a lender is required to budget your ability to repay based on your NET income as filed on your tax returns.They can add back in depreciation, but
that’s about it. So, if you are self-employed and show limited income, this could dramatically impact obtaining a home loan.
We see this all the time, a family runs a great family business, makes great money and does what every American tries to do, limit their tax liability. We get it! The Lender gets it! Unfortunately, there is nothing which can be done if a self-employed person deducts a large potion on their tax return and only shows limited income or in a lot of cases, shows a loss.
A lender will require 2 years of self-employment income before offering loan terms so be pre-pared to provide last two years of tax returns or in some cases a current profit and loss if several months into the current year.
Before your loan becomes 100% complete, you must have a completed insurance policy and binder. Most of the lenders today offer insurance through their business. If you take their insurance it can be financed in your loan. In some cases, if using your local agent, a lender may require you to pre-pay that years insurance premium in full.
Please be aware most lenders have a maximum allowed deductible. They will require you to have a deductible of $1,000, no more. Again, polices vary, lender to lender, but something to consider.
Binders will be rejected by the lender if address is incorrect, year model of home is incorrect, names spelled wrong, etc. If using your local agent, please instruct them to be accurate on the binder.
If your property is in a flood zone, you will be required to pay flood insurance. In some cases, a portion of your property may be in the flood zone, while your home may not. This can cause a delaying in closing, until we can show the lender where the house will actually sit on your property.
Almost all lenders today require your estimated annual property taxes and hazardous insurance be a part of your monthly payment. This money is paid monthly to the lender, who puts it in an escrow account and when your insurance premium is due they pay it. Same thing with your property taxes. They do not charge you fees or interest on escrow account money.
As the years go by and insurance and/or property taxes increase, this could cause your monthly payment to increase.
Most lenders will add 3 months’ worth of escrow payments in your escrow account at closing, financed in your loan of course OR require you to pay this at closing. This acts as a buffer for increase taxes or insurance and can help give more reaction time for the borrower when/if a monthly payment may increase.
When using paystubs to prove your income amounts, they must include your year to date income totals. A lender will also want a paystub pay date “date paid” to be after your loan application date.
Drivers License / Social Security Card:
Your lender must prove your identify. These two items are the easiest to obtain and most common requested by lenders. However, if your driver’s licenses is expired, they will want it reinstated before they will close your loan. Same goes with other ID proof sources.
Of course, there are a lot more items to discuss on financing, but I hope this has helped you or at least given you some understanding of the process, terms and general process of financing a manufactured home.