How To Get A Loan For A Prefab House

A prefab (prefabricated) house is a building constructed off-site, either in sections (modules), individual components (kits), or panels, and then transported to the final location for assembly.

While prefab homes offer benefits like quicker construction and reduced waste, getting a mortgage for them can be challenging.

This is where Home Loan Experts comes in. We will explain how you can improve your chances of getting a loan for your prefab property.

Why Is It Difficult To Finance A Prefab House?

Prefab homes are gaining popularity in Australia due to their affordability and efficient construction. However, financing these properties isn’t as straightforward as for traditional homes.

There are unique challenges that come with financing a prefab house, largely because of how lenders assess risk. The major concern for lenders is valuation and depreciations.

Traditional homes often appreciate, driven by land value, especially when well-maintained and in prime locations. prefab home appreciation is variable, though; quality builds on foundations can hold value, but others may depreciate due to perceived lower quality or poor maintenance.

Another issue is land ownership versus homeownership. If you place a prefab house on rented land, it disqualifies the home from mortgages.

Due to these challenges, borrowers often need to work with specialised lenders who understand the prefab home market. Additionally, securing financing may require larger down payments or higher credit scores than for traditional homes.

Financing Different Types of Prefab Houses

Prefab is a broad term for homes partially constructed in factories before being transported to their final location. They are often referred to as transportable homes.

We can place prefab houses into three categories, broadly, as shown in the table below:

To sum up, financing depends on whether your prefab home is classified as property, with permanent foundations increasing the likelihood of securing a traditional loan.

Which Lenders Finance Prefab Houses?

Several lenders offer financing options for kit and prefabricated homes, though their lending criteria and risk assessments vary.

While some banks accommodate homes that are partially or fully constructed offsite, others require onsite assembly by a registered builder to qualify for funding.

In addition, loan-to-value ratios (LVRs), valuation requirements, and acceptable construction stages differ among lenders.

Here’s an overview of how lenders view prefab houses:

• Some lenders allow kit homes that are either partially/fully constructed offsite or delivered as building materials for onsite assembly.

• There are banks that accept prefabricated homes, including kit and relocated homes. But the house must be built onsite by a registered builder and follow standard construction-loan procedures. A valuation by a licensed valuator is required, and the maximum LVR is 80%.

• Lenders may also consider kit and prefabricated homes under their Owner Builder policy, which is more restrictive. These borrowers are seen as high risk, subject to strict conditions, and limited to 80% LVR based on land value only.

• Banks accept kit homes but do not fund unassembled kits or any offsite construction costs. Funding before installation is not allowed.

Requirements For A Prefab Mortgage

The general requirements for financing a prefab property include:

• Valuation from a licensed valuator for loan approval.

• Maximum 80% LVR.

• Registered builder must assemble the home.

• Progress payments and inspections are necessary.

• Fixed Price Contract often required

• No funding for unassembled kits or offsite work.

How To Get A Loan For A Prefab Property

Getting a loan for a prefab property can be challenging, as lenders often see prefab homes as higher risk due to concerns about valuation, depreciation, and construction complexities.

However, there are a few things you can do to strengthen your loan application:

Save A Larger Deposit

Most lenders cap the loan-to-value ratio (LVR) for prefab homes at 80%, meaning you’ll need at least a 20% deposit.

A larger deposit not only increases your approval chances but can also help secure better loan terms, such as lower interest rates. So, save a larger deposit before you start looking for a prefab loan.

It reassures lenders that you’re a low-risk borrower.

Work With A Registered Builder

Lenders prefer prefab homes to be assembled by a licensed, registered builder rather than an owner-builder. This ensures the home meets all necessary building codes and structural requirements.

A professional builder also provides a level of financial and quality assurance, making the loan-application process smoother and increasing the chances of lender approval.

Secure A Fixed-Price Contract

A fixed-price building contract (FPBC) outlines the total cost of the project, reducing the risk of budget overruns. Lenders prefer this agreement because it provides financial predictability.

Without an FPBC, lenders may view the project as high risk, which can lead to stricter loan conditions or even rejection of the application.

Ensure The Home Is Permanently Affixed

To qualify for a traditional mortgage, the prefab home must be placed on a permanent foundation and legally classified as real property.

Homes that remain movable or placed on leased land may require alternative financing, such as chattel loans – loans specifically designed for purchasing moveable property – which typically have higher interest rates and shorter repayment terms.

Have A Strong Credit Profile

A high credit score demonstrates financial responsibility and improves the likelihood of loan approval. Lenders assess your credit history to determine risk, and a strong profile can help secure better interest rates.

Paying down existing debt, maintaining a low credit-use ratio, and ensuring timely bill payments can all boost your creditworthiness.

Key Takeaways

• Financing a prefab home comes with unique challenges.

• Understand lender requirements to improve your approval chances.

• Save a larger deposit to strengthen your mortgage application.

• Work with a registered builder to meet lender criteria
• Secure a fixed-price contract for better loan approval odds.

• Ensure your home is permanently affixed to qualify for more financing option.

• Maintain a strong credit profile to access better loan terms.

Ready To Take The Next Step?

If you’re considering a prefab property, working with a mortgage expert who understands the complexities of prefab financing can make all the difference.

Call us on 1300 889 743 or enquire online for free to talk with our experts. .