How To Get Finance For Your New Modular Home

Want to buy your dream modular home? This guide unlocks the secrets to financing your new modular home purchase and gives you actionable steps you can take.

As you might have noticed, the dynamics in the housing and lending market have changed over recent years. While these dynamics continue to change, there are still many people who are looking to build a new home, and of course, this means that there are still many people searching for the best way to finance their new home build.

If you’re in this category, you might be wondering how to get finance for your new build and what steps you need to take. Bear in mind that getting finance for a modular home can be a little more challenging, so you’ll need to consult a broker who is well-versed with this type of borrowing to guide you along the way.

Before we consider some of these challenges, let’s first take a look at the initial steps needed and then we’ll discuss how lenders work and what they’re primarily looking for before they’ll offer you a loan.

1. Understand how much you can borrow.

The first step you need to take is to look at how much you can actually borrow. This will be determined by a
number of factors:

  • How much you’ve saved for a deposit.
  • What other assets you currently own as well as their value. This could include the land that you want your modular home positioned on.
  • How much you can comfortably repay based on your current earnings.
  • Whether your ability to sustain these repayments might change in the future.
Your available cash deposit.

Your current savings play a crucial role in how much you can borrow. Bear in mind, that to avoid having to pay Lenders Mortgage Insurance (LMI), you might need at least a 20% deposit. That’s 20% of the current purchase price of the home you want to build or the total value of the house and land once the modular home is actually sitting on your land.

But here is where it can get a little complicated because many lenders will have difficulty determining the actual value of the home and land as a whole until the house is actually positioned on the land. That’s definitely when you want to consult a professional who can guide you.

You might be eligible for a range of different home buyer schemes that are available through various state governments. For example, in NSW, there are several schemes that you can apply for:

But, you’ll need to do your homework as to whether these will apply to modular homes.

Your current assets.

If you already own the land that you want to build on, then this is considered an asset and can be used as some security towards your loan.

With a modular home, this might be the only security that you’ll have in the beginning because many lenders won’t consider the value of the home itself while it’s being built in the factory. They’ll only start to consider its value once the home is actually transported to your land and services have been connected.

Other assets that will be considered are any shares or other investments that you have, your superannuation, any motor vehicles that you own, jewellery, artworks and also your household contents.

Your current earnings.

Your current earnings will determine how much you can afford to repay each month. While there’s a basic formula that you can use to work this out, lenders will often have their own set of criteria that they use to determine your repayment capacity.

In its simplest form, the formula you want to consider is:

  • Weekly income minus regular weekly expenses = available weekly repayments

This is an overly simplified way of looking at how much you can afford to repay because you’ll also have to factor in putting aside some money each week for emergency expenses, holidays and other expenses that are likely to crop up periodically such as rates, school fees etc.

But this at least gives you a starting point to work with.

It’s far better to be a little conservative when you’re looking at how much you can repay so that you have a buffer to work with.

You also want to consider your future plans as these could affect your ability to meet your mortgage repayments.

For example, if you’re single, are you planning to get married? If you’re a couple, are you planning to have children? What would happen if you suddenly lost your job? Or, maybe you want a career change and plan to undertake some studies.

Talk to a mortgage broker.

Once you have an idea of how much cash deposit you have now or how much you’re likely to have when you want to start building, and how much you can comfortably repay on your current earnings, the best thing you can do is talk to a mortgage broker.

When looking for a mortgage broker to work with, make sure that you select one who’s familiar with the modular building industry and one who has access to lenders who are comfortable with providing loans to people who are considering the purchase of a modular home.

An experienced broker will be able to sit down with you, look at your current financials and guide you on how much you can borrow and who will be the best lender for your particular circumstances. Your broker will also be fully conversant with any grants or schemes that you might be eligible for to help you with the purchase of your new home.

2. Carefully research all of your options.

Once you’ve had the initial contact with a mortgage broker, you’ll be more aware of the options that you have available.

For example, do you own your land already or are you still paying it off? If it’s the latter, you might need to include the remaining amount owing as part of the new mortgage. This might reduce the amount you have available for the home itself.

If you have investment assets such as shares or term-deposit accounts, can you cash these in to increase your deposit? Or, do you have family or friends who would be willing to lend you some money to add to your deposit?

Maybe, you might find that you need to wait a bit longer and keep putting money away to increase your deposit over time. But remember that prices will continue to rise in the meantime.

While you’re doing your research, make sure that you stay connected with your mortgage broker and discuss any options that you’ve come up with.

3. Budget for the progress payments

Remember that often, the lender who you’re going with might not be prepared to make any progress payments while the home is still being built in the factory. But these payments will still need to be made to the building company.

This means that you’re going to have to budget for these and ensure that you have enough money set aside at the beginning of the build to be able to meet these progress payment obligations.

You might find this a little challenging but remember that once the home is actually transported to your land, it is then regarded as a permanent residence and part of the overall value of the home and land package. Once this happens, the lender should allow you to start drawing down on the loan to recover the money that you’ve already outlaid for the progress payments.

So you might want to be a little creative here. Maybe, you could borrow the money that you need for the progress payments from friends and family with the proviso that this will be paid back once you have access to the loan funds.

While you’re doing your research, make sure that you stay connected with your mortgage broker and discuss any options that you’ve come up with.

4. Formulate your plan.

Gather as much advice as you can from your mortgage broker, a financial adviser and even family and friends to formulate your plan of action.

This might include applying for any government funding that you might be eligible for, selling some shares or other investments or borrowing some money from family or friends to gather the required amount of cash for a decent deposit and also the progress payments while the house is being built in the factory.

At the same time, you want to ensure that you have all of your financial paperwork in order and have a clear statement that shows your earnings, your regular expenditure plus any assets that you own. The better organised you are, the better support your broker can give you.

You might also want to take advantage of the numerous mortgage calculators available online to see what your repayments are likely to be for the amount that you want to borrow.

What do lenders look for when you apply for a loan?

There are basically four things that lenders will look at carefully before they decide to grant you a loan.

  • Security – the value of the home and land as a whole (this only applies once the home is actually sitting on the land. Before that, your land might be the only security considered.)
  • The amount of cash you have available for the deposit and the progress payments
  • Your ability to make repayments now and in the future
  • Your exit strategy
Security.

All mortgage lenders will look for a level of security that will ensure that they can recoup their money if you default on the mortgage repayments. This security is usually in the value of the combined home and land package that you’re borrowing for.

That’s why the more deposit you have, the more likely your loan application will be approved. This is even more important if you want to have a modular home built that will eventually be positioned on your land.

The reason for the needed security is that In the event that you default on your loan, the lender will be looking for a quick sale and this might mean a necessary reduction in the sale price of the home.

Another thing to consider is getting a guarantor home loan. This is when you approach a family member who agrees to use the equity in their home to provide security for your new home.

Your deposit and savings record.

As we’ve already mentioned, the more deposit you have, the higher your chances of getting approved for the loan.

Lenders also like to take a look at your savings record. Your savings record shows your ability to budget and that you have control over your finances.

Your ability to make repayments.

Even if you’re on a fairly high income, it won’t necessarily mean that you’ll instantly be approved for the loan although this will certainly help.

Essentially, lenders will look at your income versus your expenses to determine whether you’ll be able to comfortably make the necessary repayments.

But if you’re a professional in a secure and high-paying industry such as a legal or medical practitioner or an accountant or financial consultant, you might find that some lenders will only require a 5% deposit and they’ll waive the LMI.

Your exit strategy.

Lenders will also want to know what your plans will be if something changes. This is particularly pertinent for people who are in a more mature age bracket.

For example, they’ll want to know what you’re going to do when it’s time to retire or if you’re no longer able to meet your repayment obligations.

Your mortgage broker will be able to assist you with formulating an exit strategy that will keep lenders happy.

Top tips for getting finance for your new home.

Now that you understand the steps that you need to take to secure a loan for your new modular home and you’re aware of what lenders look at before approving your application, here are some top tips to consider:

  • Get together as much of a cash deposit as you can.
  • Pay off your land in full if you can to use as security.
  • See if you can borrow money from family or friends to increase your deposit and/or help to make the progress payments.
  • Cash in any investments that you might have to add to your deposit.
  • If you own recreational vehicles, consider selling them to add money to your deposit.
  • Check out your eligibility for government home buyer schemes.
  • Don’t rely on pre-approval because the lender still has to approve the actual property and you’ll have to meet certain conditions before you can actually borrow the money.
  • Have a very clear and precise exit strategy that you can present to a lender if something does go wrong.
  • Talk to a mortgage broker who has access to lenders who understand modular homes and who can guide you from the beginning and let you know what’s possible.

Is there a difference between getting a loan for an onsite house and a modular home?

As we’ve already discussed, getting a loan for a modular home could be slightly more challenging than getting one for a home that’s being built on site.

Once again, a mortgage broker who’s highly experienced with this type of new build will be able to offer some solutions and give you expert advice on what you can do.

It’s always a good idea to ask the builder you want to work with for referrals to experienced mortgage brokers who can assist you with getting finance. Builders of modular homes should have the right connections with mortgage brokers who are well-versed on the intricacies of borrowing money for a new modular home.

At the end of the day, having a professional on your side is the best decision that you can make. Navigating the various aspects of getting finance for your new modular home can be complicated and you want to ensure that you get the best advice possible.

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