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Construction financing for modular homes

By Pat Curry
Financing construction of a modular home is essentially the same as it is for building a new house on-site, says Tom Talarico, senior vice president of the system-built homes division at Waterfield Financial Corp. in Fort Wayne, Ind.

While consumers who buy an existing home just apply for a mortgage, in many cases a buyer who is building a house needs a construction loan first. That loan provides the funds for the builder to purchase the materials and hire the labor to build the house. Each withdrawal from the loan account is called a draw.

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It's a short-term loan, generally in the range of several months that operates somewhat like a home equity line in that you only pay interest on the portion of the amount that's been drawn out of the account. For example, if you have a $100,000 construction loan and at the end of the first month, you were to only use $20,000 of it, the loan payment would be calculated on the $20,000 until another draw is taken. After the house is finished, the buyer can convert the loan to a traditional mortgage.

Like a construction loan for a site-built house, a consumer building a modular house would need evidence of ownership of the land, a purchase agreement with the builder and a set of plans and specifications for the house, Talarico says. The primary difference between construction loans for site-built and modular houses is the length of the term and the number of draws. On a modular house, the lender also will need to understand that the manufacturer will want to be paid before delivery.

While the duration of a construction loan for a site-built house might be from six to 12 months, a loan for a modular house generally runs three to four months, he says. That should translate into paying less interest.

Plus, a modular house usually has no more than four draws. "In site-built, it can be a lot more than that," he says.

 
-- Posted: July 22, 2004
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