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Key Concepts for Mobile Home Buyers

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If you are ready to end the rent cycle but do not have the income to purchase a traditional single-family residence right now, you may be considering a mobile home. While it is true that you can purchase and occupy a mobile home for significantly less money, there are also some potential drawbacks that you should consider. Take a look at our take on the benefits and drawbacks of this type of real estate purchase.

The Pluses

  • Affordability. You can often find mobile homes at price points comparable to townhomes or apartments, but you generally get significantly more square footage, and you do not have to share a building with other people. In addition, you get your own outdoor space, a contained yard that you can put to your own use.

  • Minimal associated fees. In some cases, you might have to pay a bare-land condominium fee, but if you live in a privately owned mobile home park, that fee often takes care of water and sewer connections, as well as garbage and snow removal.

The Bad News

  • Value depreciation. When you apply for financing to purchase a mobile home, the depreciation is likely going to be the most significant factor in the lender’s decision. So it is important to understand how depreciation works – and why it is so important in this case. Throughout Canada, you can find buildings that are well over 100 years old. In the vast majority of cases, buildings can easily be useful for at least six or eight decades, depending on how well it is maintained and the durability of its construction. The term for this is “physical life.” A property’s “economic life” describes the length of time a property’s improvements will add to the value of the property overall before they have to be torn down and replaced. A building’s economic life is generally shorter than its physical life. Most mobile homes have an economic life that maxes out around 45 years, making it depreciate significantly more quickly than other types of structures. Then there is a property’s “effective age.” This comes from the current overall maintenance of a property, as well as its current condition. Sometimes effective age is higher than physical age, if maintenance has not been done or if the construction was shoddy. The appraiser’s job is to inspect the property and estimate its effective age. When you subtract effective age from economic life, you get “Remaining Economic Life,” or REL. This is the amount of time that the building will continue to have economic value. In most cases, the economic age-life method is used to calculate the depreciated value. If you divide the effective age of a building by its economic life, then you get depreciation. Improvements and renovations can reduce the effective life of a property, which means that you can boost the value of a property, even of a mobile home, with regular maintenance and appropriate improvements. Since mortgages are generally calculated on the basis of a 25-year amortization, if your mobile home only has about 25 years of REL, the lender may not approve your application.

  • Property Value. Depending on the Lender, the overall property value will play into your application significantly. Some Lenders will not finance property’s valued at under $100,000, others $150,000, and some $200,000. Each Lender has specific internal guidelines they abide by with some exceptions. Credit Unions tend to have the most flexibility, and if that isn’t an option you may need to consider a private lender and it must accompany significant equity of 35% or greater depending on the location and condition. In addition, a clear exit strategy to have the loan paid out in reasonable short term time of 1 – 3 years in most cases.

  • Tie-downs and anchors. Having the proper anchors and/or tie-downs on your home is a must because otherwise, lenders will treat the property as a chattel. In other words, it is a lot easier to take the property and go, as some borrowers might be tempted to do if they fall behind on the payments. That elevates the risk to the bank, which makes approval less likely.

  • Additional maintenance. Canada often experiences extreme cold in its weather. Mobile homes that have plumbing under them either need heat-traced piping or skirting that insulates the bottom of the mobile home. Otherwise, your pipes are at high risk of bursting when temperatures dip well below freezing. Also, when it snows, make sure that your skylights remain clear of it, as the moisture can seep in at the seams and cause damage.

The Last Word

If you are still interested in buying a mobile home, you want to do your homework to make sure that it will have the Remaining Economic Life to sell when you are ready to move somewhere else. That means talking with your appraiser to get the hard truth about the current condition of the home and committing to top-shelf maintenance going forward. It also means going the extra mile with respect to insulating your pipes and keeping moisture from getting inside.

Other question? Contact us at Amansad Financial to find out about financing options for your mobile home purchase. We look forward to hearing from you!

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Daniel K. Akowuah | Mortgage Professional / DLG Underwriter
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