What Is a Chattel Mortgage?
A chattel mortgage is a loan used to purchase an item of movable personal property, such as a manufactured home or a piece of construction equipment. The property, or chattel, secures the loan, and the lender holds an ownership interest in it. A chattel mortgage differs from a regular mortgage in which the loan is secured by a lien on a stationary property, such as a house or office building.
- With a chattel loan, the movable property, or chattel, that it is used to purchase secures the loan. The lender holds an ownership interest on it.
- Mobile or manufactured homes, where the homeowner buys the living unit but not the land it occupies, are often financed with chattel mortgages.
- Heavy business equipment, like a bulldozer or forklift, can also be purchased using a chattel loan.
- Chattel loans are often more expensive than traditional mortgages, but low-interest, government-backed loans are available to some borrowers.
Understanding Chattel Mortgages
Chattel loans are referred to as security agreements in some areas of the country. The terms "personal property security," "lien on personal property," or even "movable hypothecation" are other synonyms for a chattel mortgage.
Whatever they are called, chattel mortgages are used by borrowers only to purchase movable (non-stationary) property and tend to have shorter terms than regular mortgages, meaning that they have to be paid back more quickly.
Chattel Mortgage vs. Traditional Mortgage
A chattel mortgage differs from a traditional mortgage in that the lender owns the property until it has been paid off. With a regular mortgage, the lender isn't the owner but has a lien on the property, allowing them to take possession of it in the event of a default. With a chattel mortgage ownership transfers to the buyer at the end of the mortgage term, assuming all the payments have been made.
Examples of Chattel Loans
Vehicles, airplanes, boats, farm equipment, and manufactured homes are common examples of assets that are often financed with a chattel loan. Currently, about 42% of the loans used to purchase manufactured homes are chattel loans, according to the Consumer Financial Protection Bureau.
Chattel loans have specific rules, which can vary according to the type of property. For example, chattel home loans must be registered in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers who want to put the property up as security for another loan. Security agreements associated with aircraft are also typically recorded with the Aircraft Registration Branch of the Federal Aviation Administration.
Mortgages on personal property like chattel loans typically carry higher interest rates than traditional mortgages and also come with shorter terms.
Types of Chattel Mortgages
Mobile/Manufactured Home Loans
Chattel mortgages are frequently used to finance mobile, or manufactured, homes that are situated on leased land. A traditional mortgage can't be used because the land doesn't belong to the homeowner. Instead, the mobile or manufactured home is considered "personal movable property," and it can serve as security for a chattel mortgage. The financing arrangement remains in effect even if the mobile home is moved to a different location.
The U.S. Department of Housing and Urban Development (HUD), the Department of Veterans Affairs (VA), and the Department of Agriculture's Rural Housing Service all have programs to guarantee manufactured home loans issued by approved private lenders to eligible borrowers. HUD, for example, will guarantee a loan of up to $69,678 for a manufactured home without land through its Federal Housing Administration (FHA) Manufactured Home Loan Insurance program. These government-guaranteed loans tend to have lower interest rates than other private loans and some added consumer protections.
The interest rates on other loans can vary "based on the age and size of the home, the amount of the loan, the amount of the down payment, the term of the loan, the site location, and the borrower's credit," according to the Manufactured Home Institute, a trade group.
Businesses frequently use chattel mortgages to purchase heavy equipment for construction, farming, or other purposes. Heavy equipment tends to have a long lifespan and also to be expensive. For that reason, a business may prefer to pay it off over time rather than commit the money to buy it outright.
A chattel mortgage allows the buyer to use the equipment, while the lender retains an ownership interest. The lender can recover the equipment and sell it to pay off the loan balance if the buyer defaults. Chattel mortgages are used to purchase both new and used equipment.
The U.S. Small Business Administration can be a source of low-cost financing for business-related equipment. Like other government agencies, it doesn't issue loans but guarantees eligible loans issued by an approved list of commercial lenders. Its 504 Loans, for example, can provide up to $5 million for long-term machinery and equipment purchases.
Benefits of a Chattel Mortgage
A chattel mortgage may be the only way for a prospective buyer of manufactured housing to afford their own home. In the case of commercial borrowers, a chattel loan will allow them to buy an expensive piece of equipment that could be out of reach if they had to pay cash for it.
Disadvantages of a Chattel Mortgage
As mentioned, chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages. They also have shorter terms, so monthly payments can he higher. (On the other hand, the property will be paid off sooner.) The typical term on a chattel loan for manufactured housing, for example, is 15 or 20 years, rather than the 30-year term that's available on many regular mortgages.
Chattel Loans FAQ
Where can I get a chattel loan? Chattel loans are offered by both brick-and-mortar and online lenders, some of which specialize in a particular type of property, such as mobile homes, aircraft, or construction equipment. Sellers, such as manufactured home dealers, may also arrange for financing. But shop around for the best deal.
If I have a choice between a chattel mortgage and a regular mortgage, which should I opt for? In most cases, the regular mortgage. It will typically have a substantially lower interest rate.
How much of a down payment is required for a chattel loan? That can depend on the loan, the lender, and your credit score. With the FHA's Title 1 loans, for example, borrowers with a credit score above 500 are required to make at least a 5% down payment, while those with lower scores must put down at least 10%.