Everything you should know about financing a modular home

A modular home is made up of modules or sections that are built in a factory and then moved and assembled at its permanent location. Once assembled, it often can be difficult to tell a modular home from a traditional site-built one.

While financing for nontraditional housing can be difficult to come by, loans for buying a modular home are relatively straightforward to get. Rocket Mortgage gives you the option to finance a modular home once it's built.

What is a modular home?

Modular homes are customized, prefabricated homes built off-site in a climate-controlled factory. When prefabrication is complete, individual sections (called modules) are then transported to the property.

Once the modules arrive at the building site, the house is assembled on a permanent foundation.

Since they're built on a permanent foundation, modular homes are considered real property. That means you can finance them the same way you would a traditional home.

Manufactured homes vs. modular homes

While modular homes and manufactured homes are both prefabricated, they are different. Let's look at the key differences:

How much is a modular home?

On average, modular home prices range from $80 – $160 per square foot, according to HomeAdvisor by Angi. This equates to a typical range of $180,000 – $360,000 (and an average of $240,000) for a modular home.

That said, it’s hard to put an average overall price on modular homes because they can vary widely in size and price. Modular homes can range from a tiny home of less than 400 square feet to a 2,500-square-foot home.

Further, there are many upgrades you can choose that will bump up the price, such as building a deck, adding a garage, installing a fence, and building a basement.

Remember, you’re not just paying for the base home itself. Often, you’ll need to buy land before installing the home. If that land isn’t ready for the installation, you may need to spend more money leveling and clearing trees from the property. Then you’ll need to connect utilities and pay for the installation itself.

Even with all that, a modular home may be more affordable than a traditional one.

How to finance a modular home

How you finance a modular home depends on whether it's being built for you or you're buying an existing one.

To build a modular home

If you’re building a modular home, you’ll need a construction loan and a land loan if you need to buy property. Keep in mind that construction loans typically require higher down payments.

As a reminder, Rocket Mortgage doesn’t offer these types of loans. However, once the house is built, you’ll need to convert your construction loan to a permanent mortgage, which we do offer.

To buy a modular home

Buying a modular home that’s already been constructed is just like buying a site-built home. You can apply for mortgage preapproval to estimate how much you can borrow. Once your offer is accepted, you'll submit a full mortgage application and provide documents such as W-2s, tax returns, pay stubs, and bank statements.

Types of home loans for modular homes

Here are several loan options for buying a modular home.

• Conventional loans: Most conventional loans conform to standards that allow lenders to sell them to Fannie Mae or Freddie Mac. Those standards state that prefabricated homes attached to a permanent foundation, including modular homes, are treated the same as site-built housing. Conforming conventional loans typically require a minimum down payment of 3%¹ and have a maximum loan amount that varies by county.
• FHA loans. The Federal Housing Administration (FHA) loan program offers mortgages for modular homes that are affixed to a foundation. The FHA treats modular homes the same as stick-built housing. FHA loans require a minimum down payment of 3.5% with a credit score of 580, or a down payment of 10% with a score between 500 – 579.²
• VA loans. For home buyers with a qualifying military connection, VA loans offer an opportunity to buy a modular home with no down payment.
• USDA loans. The U.S. Department of Agriculture makes mortgages available to low- and moderate-income borrowers buying a qualifying home in specific rural areas. You might not have to make a down payment on this loan type, which may cover both the home and the necessary land. Rocket Mortgage currently doesn't offer USDA loans.

Modular home loan requirements

As you navigate the modular home purchase process, expect to face the following loan requirements:

• Credit score. Although lenders often prefer to work with borrowers who have good credit, many lenders are willing to work with prospective modular home buyers who don’t have a good credit score. For example, the USDA doesn’t set a minimum credit score requirement. That said, many lenders do have a minimum credit score, which varies by lender.
• Down payment. Making a 20% down payment isn’t necessary to purchase a home. In fact, some loan programs don't require a down payment.
• Sufficient income. You'll need sufficient income to cover the loan payments.
• Debt-to-income (DTI) ratio. Most lenders impose a maximum DTI. Usually, your DTI cannot exceed 43%, but it may be higher under certain circumstances. If your DTI is too high, work on paying down other debts before purchasing a home.

Pros and cons of modular homes

It's important to weigh the pros and cons of buying a modular home before committing.

Advantages of modular housing

Here are some of the pros of owning a modular home:

• Sustainable construction. One of the largest benefits of modular construction is reduced waste. Because companies can order supplies in bulk to a single location, the environmental impact of transporting small batches of varying materials for on-site builds is lessened. The manufacturing process reduces over-ordering of materials. Plus, building in a controlled environment that isn't subject to weather-related disruptions can reduce delays and waste.
• Affordability. Arguably, the most compelling perk of modular homeownership is the bang for your buck. While modular homes are virtually indiscernible from stick-built homes, they’re considerably cheaper to build.
• Earlier move-in date. A modular home can be constructed in weeks rather than the months or even years required for on-site construction.
• Traditional mortgage options. Lenders appraise modular homes the same way they do on-site builds. That means you can expect the same competitive interest rates, insurance premiums, taxes, and loan options as traditional houses. All standard options are available, including conventional, FHA, and VA loans.
• Customizations. Manufacturers often have multiple floorplans available to mix and match to meet your specific needs. The interior can be designed however you like – rustic, modern, log cabin style, and so on.
• Energy efficiency. Modular homes are often built to be more energy-efficient than their stick-built counterparts. You’ll feel the effects when your monthly utility bill arrives. Plus, their highly customizable nature allows you to choose home solar panels and other energy-efficient options.

Disadvantages of modular housing

There also are limitations and drawbacks to modular homes.

• Land: Since modular homes are immovable, it doesn’t make sense to build on rented land. If you’re building a modular home from scratch, you’ll need to buy and prepare land before you can install your home.
• Up-front costs: While a manufactured-home owner could just rent land, you’ll need to spend more up front. Preparing the land alone may cost $4,000 – $11,000, including surveying and excavation, if it's undeveloped.
• Zoning restrictions: As popular as modular homes are, they account for only a small percentage of homes in the United States. Many cities either have outdated or an absence of zoning laws, which can make finding appropriate land difficult.
• Construction loan: You’ll likely need a construction loan to pay for the manufacturing of your new home. Those may require a 20% – 25% down payment and can be converted to a permanent mortgage after construction. Rocket Mortgage doesn’t offer construction loans, but we can help you with permanent financing.

FAQ

Still undecided if a modular home is right for you? Here are some answers to the most frequently asked questions to help you learn more.

What’s the difference between a modular home and a traditional home?

Traditional homes are built completely on-site. On the other hand, modular homes are constructed in a factory and then transported and assembled on a permanent foundation on the owner’s land.

What is another name for a modular home?

The terms "modular home," "manufactured home," and "mobile home" are sometimes used interchangeably, but there are important distinctions among them. Modular homes are held to the same building codes as stick-built homes, and they're assembled on a permanent foundation. Manufactured homes, known as mobile homes before 1976, comply with federal HUD codes and can be moved.

Do modular homes appreciate in value?

Modular homes appreciate in much the same way as traditional, stick-built homes do. This means the value of modular homes can also go down with fluctuations in the real estate market.

The bottom line: Modular homes can be financed with traditional loans

Unlike manufactured homes, modular homes offer many traditional financing options. Plus, they tend to be quicker to build than their stick-built counterparts, cost less, and can be more energy efficient. However, you'll want to stack the pros against the cons to see if a modular home is the best choice for you.

If you're ready to buy a modular home, explore your borrowing options today with Rocket Mortgage.

¹The 3% down payment option is only available on certain conventional loan products and is not available in all states. Additional terms and conditions may apply.

² To qualify for this offer, you must meet all standard FHA eligibility requirements. In addition, your total mortgage payment, including taxes and insurance, cannot exceed 38% of your income, your debt-to-income (DTI) ratio cannot exceed 45%, and you must have 12 months of verifiable housing history immediately prior to your application, no late payments 30 days or greater in the last 12-months, and no derogatory marks on your credit report. Not available on jumbo loans. Asset statements may be needed, no more than 1 day of non-sufficient fund fees are allowed in the most recent 2 months prior to application. Additional restrictions/conditions may apply.