Everything real estate agents need to know about financing prefab homes

From your side of the market, as a real estate agent you’ve probably seen how the fluctuations in housing demand, interest rates and home prices have left out some buyers (particularly first-time buyers) or sellers looking to make a move. Add to this the obstacles in the field of zoning plans, administrative red tape and resistance from the neighborhood, and the gap in housing supply and affordability remains difficult to close.

But now a new housing trend is emerging: factory-built prefabricated (e.g. modular) installations that promise faster timelines and lower costs for developers and buyers alike compared to traditional on-site methods.

This prefab buzz is fueled in part by the federal government’s new Build Canada Homes initiative, backed by commitments outlined in the recent fall budget. For example, the program aims to help finance and install 4,000 prefab units on federal land, with capacity for an additional 45,000, hailed by some as a solid step toward easing Canada’s housing crisis.

These units are primarily non-market public housing. But as capacity increases, the efficiencies could spill over to the residential market – perhaps seeing more prefab homes popping up in MLS listings near you.

While the inventory potential exists for brokers, lenders still need to assess the risk depending on what the buyer is looking at. Specific conditions are attached to prefab homes, which makes financing more difficult to obtain.

Here’s how prefab financing compares to on-site home construction – to help you guide your clients through a typical process or one that requires extra maneuvering.

Ownership vs. leased land

There’s one big question that separates the prefab crowd: Is the house on land they own or on leased land?

If the prefab home is on land that the buyer owns (real estate, such as a typical home), the mortgage approval process may be very similar to that of a site-built home. This may depend on the location of the home, the borrower’s information, and additional prefabrication requirements that are met, such as CSA building compliance.

However, prefab homes on leased land receive a completely different treatment. In these cases, buyers typically need a real estate mortgage, a “personal property” loan similar to car financing, and with fewer options for lenders since the land cannot be part of the loan collateral.

Many mobile, manufactured or modular homes are located on leased land, as some landowners choose to generate profits by offering more affordable and efficient housing options or a modern lifestyle.

Standard versus chattel mortgage

We can often help buyers who are considering a prefab home on real estate to obtain a standard mortgage, provided that the home meets (at least) the following conditions:

• The unit is permanently mounted on a foundation (not movable).
• It meets CSA certification standards for construction and safety.
• It is already installed or within 120 days of completion, similar to a site-built home.
• An appraisal confirms the market value and resale potential.

Ultimately, the buyer’s financial profile still determines the final approval.

These customers have access to a wider range of lenders, including banks, non-bank lenders and credit unions – and an expert mortgage broker can help them find the best solution overall.

That said, big banks may be less flexible with prefab properties. Non-bank lenders, such as our in-house THINK Financial – a CMHC approved lender – can often consider broader borrower and real estate situations while still offering competitive mortgage rates and features.

A chattel loan for a prefab on rented land, on the other hand, is not a standard mortgage product, and it is something that most mortgage brokers cannot help with:

• Not normally available through mortgage broker channels
• Some major banks may offer these types of personal loans on a limited basis
• May be available through the landowner, developer or a specialist lender
• Higher rates and shorter terms generally apply and may depend on the rental period

A prefab financing gap

Here’s an example of a prefab financing challenge we’ve encountered at True North. One of our agents had an inquiry from someone who needed to pay the manufacturer before her factory-built home could be “ordered,” made, and later installed on site.

However, without a completed (or nearly completed) unit on land, no traditional or alternative mortgage lender would be able to help, and securing financing through a private lender is also unlikely.

Her situation shows how prefab builders and buyers face limited production financing and restrictive financing options, gaps that hinder the growth of the prefab housing market.

Are prefab homes the answer to Canada’s housing crisis?

From my point of view, prefab homes offer clear advantages, such as cost and energy efficient designs, faster assembly and easier installation in remote areas or in-fill locations. On paper they seem like the perfect housing solution.

However, as anyone in real estate and lending knows, what works in theory doesn’t always work in practice. Prefab manufacturers and builders cannot simply scale up overnight to improve conditions in the housing market. (Don’t get me started on government regulations that need an overhaul to reduce housing and credit friction.)

Still, being one of the first professionals a home seeker contacts, knowing how prefab financing works can give you an edge: You can guide buyers through the trends and realities of non-traditional construction projects, and what it could mean for their budget and timeline.