What Is a Chattel Mortgage?

Chattel Mortgages Explained in Less Than 5 Minutes

Young couple talking in doorway of their tiny house.
•••

Tony Anderson / Getty Images

A chattel mortgage is a type of mortgage used to purchase movable personal property, which is often placed on land the borrower doesn’t own. The property, or chattel, acts as collateral for the loan and can be seized by the lender in case of default. 

Borrowers looking for a loan to buy movable housing, like a manufactured home, may consider getting a chattel mortgage. As with other types of mortgages, chattel mortgages come with specific qualifications, and borrowers should consider the overall loan cost before applying.

Definition and Examples of a Chattel Mortgage

A chattel mortgage is a type of mortgage used to purchase movable property, like a manufactured home, but not the land the property sits on. Lenders more commonly refer to chattel loans by the type of property being financed, such as a mobile home loan or farm equipment loan.

  • Alternate name: Security agreement

How Does a Chattel Mortgage Work?

A chattel mortgage is used to purchase movable personal property, other than real estate, which serves as collateral for the loan until it’s repaid. Farm equipment, livestock, farm assets, and mobile and manufactured homes are a few examples of property you could purchase with a chattel loan. If you default on the loan, the lender may repossess the property.

When a chattel mortgage is used to buy an aircraft, the security agreement must be recorded with the Federal Aviation Administration.

A chattel mortgage is commonly used to purchase manufactured and mobile homes, since residents may either own or lease the land on which they’ll place the property secured by the chattel mortgage. In some cases, banks may require a chattel mortgage when the home is placed in a land-lease community.

Compared to traditional mortgages, chattel mortgages may have lower origination costs and shorter loan terms, and they may close faster. On the downside, chattel mortgages often have higher interest rates (because of the collateral type) and fewer consumer protections. The CFPB found that loan amounts and processing fees were 40% to 50% lower on chattel loans versus mortgage loans. The APR, on the other hand, was 1.5% higher.

The FHA’s requirements for chattel loan borrowers are less stringent than for traditional mortgages, which can make it easier for low-income buyers to access loans. However, other lenders may have their own criteria, and some may hold all borrowers to the same standards.

Borrowers should be aware of the differences between chattel mortgages and traditional mortgages to make better borrowing decisions.

Types of Chattel Mortgages

Heavy Machinery

An equipment loan is a type of chattel mortgage that can be used to finance heavy equipment like forklifts and large medical equipment. Lenders may require businesses that finance equipment to have a minimum amount of revenue or to have been in operation for a certain number of years.

Manufactured Home

Manufactured home loans can be used to purchase factory-built homes made after June 15, 1976, that meet the U.S. Department of Housing and Urban Development’s (HUD) Manufactured Home Construction and Safety Standards code.

A limited number of lenders originate chattel loans for manufactured homes. The CFPB identified only five national lenders: 

  • 21st Mortgage
  • Vanderbilt Mortgage
  • Triad Financial Services
  • U.S. Bank
  • San Antonio Federal Credit Union 

Smaller regional or community banks also serve local markets. Many lenders require manufactured home retailers to enter contractual agreements that allow customers to access financing. Once approved for a loan, consumers must shop within the lender’s network of retailers.

Alternatives to Chattel Mortgages

Your alternatives to a chattel mortgage depend on the type of property you’re purchasing. With machinery, leasing is an alternative to financing with a loan. This option may be preferable for businesses that don’t want to own the equipment. At the end of the lease term, the business can return the equipment or renew the lease.A traditional mortgage is also an option for a borrower who plans to purchase a manufactured home along with the land it sits on, which allows the home to be titled as real estate rather than personal property. Borrowers may have more options for lending and the flexibility to pay back the loan over a longer period of time.

Pros and Cons of a Chattel Mortgage

Pros
  • Shorter loan terms

  • Lower processing fees

  • Less stringent credit requirements on FHA loans

Cons
  • Higher interest rates

  • Fewer lenders to choose from

Pros Explained

  • Shorter loan terms: Borrowers may finish paying off their loans sooner than they would with traditional mortgages.
  • Lower processing fees: The lower upfront costs can make it easier for borrowers to take on a new mortgage.
  • Less stringent credit requirements on FHA loans: This may make it easier for more financially vulnerable or lower-income homebuyers to qualify.

Cons Explained

  • Higher interest rates: Chattel mortgage rates tend to be higher than those on a traditional mortgage, which affects monthly loan payments and the total amount of interest paid over the life of the loan.
  • Fewer lenders to choose from: The lack of borrowing options, especially for manufactured homes, makes it harder for borrowers to shop around and compare loan terms for the best deal.

Key Takeaways

  • Chattel loans are used to purchase movable personal property, like machinery and manufactured homes.
  • These loans tend to have shorter terms and lower processing fees but higher interest rates than traditional mortgages.
  • Borrowers who default on a chattel mortgage risk having their property repossessed.