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Can I Use My Land As A Down Payment For A Modular Home?

A new homeowner may find it challenging to finance a modular home construction since there are several factors involved here. If you own land outright without any liens or mortgages, you can use your equity in the land to purchase a modular home. You have the option to obtain a new loan against property or use the land equity as collateral. The funds that have been deposited into your account by your financer can be used as a down payment for building a new modular home. This article discusses how you can use your land as a down payment and the consequences of doing so.

What is the Purpose of Down Payment?

A down payment is proof of personal investment into what you are purchasing and is often paid in a cash lump sum. A lender determines the amount of down payment that will be required based on the loan amount, income, and credit history. Typically, this amount falls between 5 percent and 10 percent of the total price of your home, including additional improvements rolled into the loan.

If there was no need for a down payment, anyone with a good income and credit history could easily ask for a loan. In case of a foreclosure, not only will the bank have something to lose, but the homeowner does as well. You stand to lose the thousands of dollars produced as a down payment when you first purchased your home.

How Land-In-Lieu Financing Works

Using your land instead of cash as a personal investment for a construction loan is known as land-in-lieu financing. Although land equity is valuable, it does not work the same as cash. The only thing it does is to secure your home purchase financing but reduce the actual loan amount just the way it would be if you placed cash down payment. To obtain land-in-lieu financing, little to no additional cash could be required depending on the value of the land being used and the total purchase price of your modular home. The lender holds both the lien on land and your home as collateral and only releases them when the loan is fully paid.

What This Means for Modular Homeowners

Prefabricated or manufactured homes have a lower starting price than the upfront cost of a new site-built home with land. This makes them a smart investment option, as it does not take a lot of effort to save for a down payment. Some lenders may accept land as collateral as long as the land is free of all existing liens and meets a certain percentage of the sales price. The amount of equity required as a down payment for a modular home is based on the loan program applied for as well as the borrower’s creditworthiness.

For instance, if the sales price of your new home is $300,000 and the required equity for the home loan is 10%, then your land will require an equity value of at least $30,000. A local tax assessor or an appraiser usually assesses the land value. The borrower can discuss other alternative options if the land equity fails to meet the required percentage.

Any Downsides of Using Land-In-Lieu Financing?

One of the major disadvantages of using your land as a down payment is that the lender can own both your land and modular home in case of foreclosure. A foreclosure is a legal process that allows the lender to recover the loan balance from a borrower by forcing the sale of an asset that was used as collateral for the loan. This usually happens when the borrower stops making loan payments to the lender after a certain period.

Another downside is that appraising your land for less than what the lender requires for a down payment means that you will produce the difference in cash. This means that you will invest both land and cash as a down payment to receive land-in-lieu financing. You also stand a chance to lose your land and modular home should you fail to pay back the loan balance as per your agreement with the lender.

Using your land as a down payment for a modular home can be very useful for new homebuyers who do not have the required amount of cash for a down payment. However, it is very important to understand the terms and conditions of using this type of financing before you make a move. Should you fail to pay the full loan balance to the lender, you stand a potential risk of losing your modular home and the initial amount of investment on your land.

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