What Is a Chattel Mortgage?
A chattel mortgage is a loan on movable, personal property. It’s also referred to as a security agreement, personal property security, lien on personal property, or moveable hypothec. This type of loan has advantages over a traditional mortgage or personal loan. Chattel mortgages are easily customizable so lenders and borrowers can create loan terms as they relate to the personal property in question.
Chattel mortgages are considered secured loans because the lender is offered collateral in the form of personal property. Since the property is movable, it can be easily repossessed, which gives the lender more confidence in the loan.
With more confidence in the financial stability of the loan, lenders usually set less strict qualifications for a chattel mortgage than with other loan types. Additional advantages of a chattel loan include a fast closing and lower processing fees.
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Chattel Mortgage Examples
There are many types of movable, personal property that can be financed using a chattel mortgage. Home loans for manufactured houses that aren’t attached to permanent land are common for chattel mortgages. Additional examples of assets that can be financed through chattel mortgages include:
- Modular homes.
- Farm equipment.
- Home fixtures.
- Car titles.
Land or permanent buildings cannot be financed using chattel mortgages.
How Does a Chattel Mortgage Work?
The movable personal property that’s financed using a chattel mortgage secures the loan with the lender. The lender essentially takes over ownership of the property until the loan is paid off.
Other loan terms are also decided upon, including an interest rate and loan amount. When the borrower and lender agree on the loan terms, a contract is signed. Even if the mobile home, jewelry, or other personal property is moved, the loan remains in place and the borrower is responsible for making payments until the loan is satisfied.
Chattel mortgages must be recorded in the public registry. This allows other potential lenders to know if the property in question is being used as security in another loan already. Chattel mortgages that involve aircraft must also be registered with the Aircraft Registration Branch of the Federal Aviation Administration.
Chattel Mortgage vs. Traditional Mortgage
There are differences between a chattel mortgage and a traditional mortgage such as an FHA home loan or conventional mortgage.
The loan terms in a chattel mortgage can vary slightly from a traditional mortgage. However, most loan terms are dependent on the personal property that’s being financed and the qualifications of the borrower, such as their debt to income ratio, credit score, and income. The eligibility requirements for a chattel loan are usually more lenient than other types of loans. This is because the lender has movable collateral for this secured loan that will generally be easy to sell and recoup losses if the borrower defaults.
The loan term is decided upon by the lender and the borrower and is generally shorter than traditional mortgages. For example, a conventional mortgage loan term is usually 30 years but a chattel mortgage may only be for 15 years. A shorter loan term can make monthly payments higher than they would be for traditional mortgages so it’s important for a borrower to understand how much mortgage they can afford before agreeing to the loan term.
Since loan amounts for chattel mortgages are generally lower than traditional loans, most borrowers can afford the monthly payments, even with a shorter loan term. A shorter loan term also benefits the borrower because less interest is paid throughout the life of the loan.
Since the lender has security in the loan in the form of personal property, the interest rate offered with a chattel mortgage is sometimes lower than with a traditional mortgage. However, the specific interest rate a borrower is offered depends on whether they apply for the loan through the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), or a private lender.
Some loan providers may offer special down payment or loan assistance programs, including mortgage assistance for single parents. Borrowers should check with lenders about these programs to see if they qualify for financing assistance.
The interest rate you’re offered also depends on the age of the manufactured home or the value of the personal property you’re financing. If you do qualify for a lower interest rate, it can make your monthly payments lower, which is helpful if you’re taking on a mortgage with a fixed income or if you earn a low income. The interest you pay on a chattel loan is also tax deductible and can be claimed to lower your tax liability. This is also the case with most traditional types of mortgages and second mortgages.
Type of Property
A chattel mortgage is not an option if you plan to purchase property or a home that’s on permanent land. In this case, you’ll only qualify for a traditional mortgage. If you’re purchasing a manufactured home that’s situated on leased land, you may only qualify for a chattel mortgage. Since the property is movable, it may not qualify for a traditional mortgage.
However, if you have a choice between a traditional mortgage and a chattel mortgage, you should consider getting pre-approved for a mortgage so you can review the terms of each and choose the one that’s more financially beneficial for you. While there are many benefits to obtaining a chattel mortgage, including less strict eligibility requirements and a shorter loan term, take the time to explore your options with traditional mortgages if you qualify.
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This post was updated January 2, 2020. It was originally published January 2, 2020.