What is a Chattel Mortgage?
A chattel mortgage is a loan specifically designed to facilitate the purchase of movable personal property, such as a manufactured home or construction equipment. In this arrangement, the property, also known as chattel, secures the loan, with the lender maintaining an ownership interest in the item.
Chattel loans are often referred to as security agreements, and may also be known informally as ‘personal property security,’ ’lien on personal property,’ or ‘movable hypothecation.’
Key Takeaways
- A chattel mortgage is a financial arrangement for purchasing movable personal property.
- These mortgages are typical for assets like construction equipment or mobile and manufactured homes where the land is not included.
- Chattel mortgages tend to carry higher interest rates and lesser consumer protections compared to traditional mortgages.
Various Types of Chattel Mortgages
Borrowers can use chattel mortgages to finance a range of movable property types. These loans often have shorter terms and higher interest rates than conventional mortgages. If a borrower defaults, the lender retains the right to repossess and sell the property to recover the loan balance.
Mobile/Manufactured Home Loans
Chattel mortgages are commonly used to finance mobile or manufactured homes situated on leased land. Traditional mortgages are not applicable because the land is not owned by the homeowner. Instead, the home itself serves as the collateral for the loan. Importantly, the financial arrangement stays intact even if the mobile home is relocated.
Government agencies such as the U.S. Department of Housing and Urban Development (HUD), the U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture’s Rural Housing Service guarantee loans issued by approved private lenders for eligible borrowers. HUD also guarantees loans for manufactured homes without land through its FHA Manufactured Home Loan Insurance program.
Equipment Loans
Businesses often turn to chattel mortgages for the purchase of new or used heavy machinery for construction, agriculture, and other industries. These loans enable the buyer to utilize the equipment while the lender retains an ownership stake. If the buyer defaults, the lender can take back the equipment and sell it to settle the loan.
The U.S. Small Business Administration (SBA) offers cost-efficient financing options for business equipment, although they do not issue the loans directly. SBA 504 loans, for instance, provide funding for long-term machinery and equipment purchases.
Chattel Mortgage vs. Traditional Mortgage
The key difference between a chattel mortgage and a traditional mortgage is the ownership status during the loan period. In a chattel mortgage, the lender holds ownership of the property until the loan is fully paid off. Conversely, in a traditional mortgage, the lender holds a lien on the property, allowing possession in case of default.
Differences in Interest Rates and Consumer Protections
Chattel mortgages generally come with higher interest rates and lack certain consumer protections offered by conventional mortgages. Moreover, they often have shorter loan terms, resulting in higher monthly payments.
Examples of Chattel Loans
Common assets financed through chattel loans include:
- Vehicles
- Airplanes
- Boats
- Farm equipment
- Manufactured homes
In Florida, chattel home loans are recorded in a public registry, making it accessible to third parties before entering additional financing agreements. Similarly, aircraft chattel mortgages are documented with the Federal Aviation Administration’s Aircraft Registration Branch.
Securing a Chattel Loan
Chattel loans are available through both in-person lending institutions and online lenders. Some specialize in specific types of property, such as mobile homes or construction equipment.
Down Payment Requirements
The necessary down payment for a chattel loan can vary based on the lender, the loan specifics, and your credit score. For example, the FHA’s Title I loans require at least a 5% down payment for scores above 500, while lower scores require at least a 10% down payment.
Tax Deductibility
The interest paid on a chattel mortgage might be tax-deductible, similar to a conventional mortgage. When a manufactured or modular home is fixed to the ground, additional property tax deductions may be available for borrowers.
The Bottom Line
A chattel mortgage serves to finance the purchase of movable personal property such as construction equipment or mobile homes. These loans often come with higher interest rates and fewer consumer protections than traditional mortgages. Defaulting on a chattel mortgage allows the lender to repossess the secured property or equipment.
Related Terms: traditional mortgage, security agreements, movable hypothecation.
References
- U.S. Department of Veteran Affairs. “VA Home Loan Guaranty Buyer’s Guide”, Page 14.
- Rural Housing Service. “Single Family Home Loan Guarantees”, Page 1.
- U.S. Department of Housing and Urban Development. “Financing Manufactured (Mobile) Homes”.
- U.S. Small Business Administration. “504 Loans”.
- Consumer Financial Protection Bureau. “Manufactured Housing Loan Borrowers Face Higher Interest Rates, Risks, and Barriers to Credit, New CFPB Report Finds”.
- The Florida Senate. “Chapter 698, Chattel Mortgages”.
- Federal Aviation Administration. “Aircraft Registration, Record a Security Agreement/Chattel Mortgage”.
- Federal Deposit Insurance Corporation. “Manufactured Home Loan Insurance”, Page 18.
- Rocket Mortgage. “What Is a Chattel Mortgage?”
