Government Backed Financing on Land & Mobile Home Loans
Last week we spent time discussing the process of conventional land and home financing. Today we’re back to discuss the pros and cons of using a government backed loan, often referred to as FHA or VA.
There are some key differences in the requirements between conventional and government backed financing such as down payment, site preparation, interest rates, and the little talked about Private Mortgage Insurance and we’ll break it all down in today’s blog.
Differences in FHA/VA and Other Costs
The most popular government backed, or subsidized, loans are FHA and VA.
FHA loans are geared toward first time home buyers with moderate incomes who might have difficulty producing a 5-10% down payment.
VA loans are available for active military with a minimum service requirement, veterans, and surviving spouses of deceased veterans.
The biggest difference between these two types of loans is the demographic they are geared toward and the amount needed for down payment. While FHA is very low at just 3-3.5%, VA can be even lower with as little as 0% down.
Along with the lower down payment, these loans also come with lower interest rates as well. Conventional land and mobile home packages have interest rates typically fall between 7-10% while government loans can be granted at rates between 3-6%.
While it may seem like a no-brainer to go with the lower down payment and lower interest rates, government backed loans also require you to insure your loan with Private Mortgage Insurance.
Because these loans are offering lower upfront costs and lower interest rates, the PMI will protect the bank from losing on the loan in case of foreclosure. PMI can add $200-$300 to the monthly payment of the mortgage, often bringing the payment right up with that of conventional land/home loan.
Finding Land & the Appraisal Process
Much like with a conventional loan, after the initial approval process with the lender providing the FHA/VA loan, it is time to find your property while proving the income reported on your credit application.
Government subsidized loans will tend to be a bit more picky, requiring explanations for extra deposits made in your bank account not from a job, verifying W-2’s and 1099’s with tax returns directly from the IRS, along with any other lender specific documentation.
Once the property is found, site inspection complete, and your income is cleared, it will be time to enter the “appraisal” phase of your loan.
FHA/VA will need to appraise not just the value of the property and the home, but the estimated value of the property once the project is fully completed. While conventional loans will appraise the land value in comparison with the purchase price, the government loan must equal or exceed the total cost of the land, home, improvements, and closing costs to move forward with the land purchase.
Closing on a Government Backed Land/Home Loan
There are two closings needed to finalize your land and home package.
At the first closing, almost all documentation will be signed. This is where the title of the land will be transferred to your ownership and you will sign for a “construction loan”. These documents get your mobile home ordered and built at the factory while site preparation begins on the property.
The construction loan phase lasts until every improvement is completed including utilities, AC, decks, skirting, driveways, etc. You cannot enter the home during the construction loan phase as the home itself still belongs to the bank.
Once all improvements agreed upon are fully completed, a final inspection will be scheduled. This inspection will either result in changes or repairs needing to be made to comply with FHA/VA standards, or in a sign-off on the property and the “second closing”.
At this final closing, a small packet of about 5 pages will be signed and the lender can proceed with fully funding the loan and transferring ownership of the home to you, taking you from a construction loan to a permanent loan.
With these requirements, a government backed land and home package can take anywhere from 90 to 120 days from the initial closing to move-in, the upside being that the property will be entirely turn-key.
Site Improvements & FHA/VA Construction Requirements
One of the most advantageous aspects of land & mobile home financing is including all the site work and improvements you need and want on your property all in a single home loan and having them completed all at once.
We mentioned some of the common site improvements done with land and home financing above, but government loans go beyond a conventional loan with the following conditions:
- The mobile home must be placed on concrete runners and not a caliche base pad
- It must be retrofitted with concrete piers and welded at each corner of the home to make it a permanent attachment to the property
- Decks must be built with treated lumber and to the size specified by the lender
- A preventative termite treatment must be done
- All site work must be completed by licensed contractors
Naturally, with these increased obligations, the loan needed to complete the work will increase as well. While costs may be saved by doing parts of the work yourself or with skilled family and friends on a conventional loan, this is not an option with government financing.
Why Choose a Government Backed Land/Home Loan?
With the extra work, time, and money needed to complete the full land/home project through a government backed program, why would this be a viable option for you, the potential homeowner?
Because of the low up-front costs, many families find it is the only option that can help them get the home they want with all the site work they need with a down payment they can afford.
And this is essentially the most practical reason to go with a government lending program. If more funds for the down payment can be acquired, conventional land/home conditions will significantly lower the cost and timeline of the project.
However, if planning to use only licensed contractors to complete your project and willing to take the additional steps necessary, installing the mobile home according to government lending guidelines will make later re-sale a breeze for buyers coming in with government back financing of their own.
Next week we will go into our final installment of land/home financing, discussing what is referred to as Land-in-Lieu. See you then!