Chattel Mortgage: Definition, Types, and Examples

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A chattel mortgage is a loan secured by movable personal property rather than land. The financed item, such as a manufactured home on a rented lot, a tractor, a truck or an aircraft, serves as collateral: the borrower keeps and uses it, and the lender can take and sell it if the borrower defaults. “Chattel” is the old legal word for movable personal property, as opposed to real estate. The arrangement is also called a chattel loan, security agreement, lien on personal property, personal property security or, in civil-law countries, movable hypothecation.

How a Chattel Mortgage Works

The lender advances most of the purchase price, and a security agreement gives it an interest in that specific asset until the balance is paid. The borrower makes regular payments and uses the property meanwhile. After the final payment, the lien is released and the borrower owns the item free and clear.

Under the older common-law form, the borrower conditionally transferred title to the lender until the debt was repaid, which is why some descriptions still say the lender “owns” the property until payoff. In the United States, Article 9 of the Uniform Commercial Code now treats these arrangements as security interests in personal property: the borrower generally holds title subject to the lender’s lien, and the old label survives mainly in everyday usage and some state statutes.

Because movable property can be sold or pledged again, the lender’s claim usually has to be recorded so third parties can find it. Rules depend on the asset and the jurisdiction:

• Florida requires chattel mortgages on homes to be entered in a public registry, where other prospective lenders can see the existing claim.
• Security agreements on aircraft must be recorded with the Federal Aviation Administration’s Aircraft Registration Branch.
• Many other personal-property liens are perfected through a UCC financing statement or, for vehicles, a notation on the certificate of title.

If the borrower defaults, the lender can repossess the collateral and sell it to recover the outstanding balance. A manufactured home financed this way stays subject to the loan even if it is moved to another site.

Types of Chattel Mortgages

Manufactured and Mobile Home Loans

A buyer who purchases a manufactured home but leases the land beneath it, for example in a land-lease community, has no real estate to pledge. A conventional mortgage is not available, so the home is financed as personal property. The Consumer Financial Protection Bureau has reported that about 42% of loans used to buy manufactured homes are chattel loans.

Several federal programs back this lending without making the loans. HUD’s Federal Housing Administration Title I Manufactured Home Loan Insurance program insures loans on manufactured homes without land. The Department of Veterans Affairs and the Department of Agriculture’s Rural Housing Service guarantee manufactured home loans issued by approved private lenders to eligible borrowers.

Equipment Loans

Businesses use chattel mortgages to buy new or used heavy equipment for construction, farming, transport and similar work, and the machine’s earnings help cover the payments. The U.S. Small Business Administration’s 504 program guarantees eligible long-term machinery and equipment loans made through participating lenders.

Vehicles, Boats and Aircraft

Cars, trucks, boats, airplanes and farm vehicles are all chattels, and a loan secured by one of them works on the same principle, with the title or registry record showing the lender’s interest.

Worked Example

Hypothetical figures, for illustration only. A buyer purchases a $90,000 manufactured home in a land-lease community and puts 10% down, borrowing $81,000. The monthly payment on a fully amortizing loan is:

Payment = L × r ÷ (1 − (1 + r)^−n)

where L is the loan amount, r is the monthly rate (annual rate ÷ 12) and n is the number of payments.

On the same 20-year term, two percentage points of rate add about $101 a month and roughly $24,000 in interest. Shorter terms, typical of chattel loans, raise the monthly payment even when they reduce total interest. The APR is the cleaner way to compare offers because it folds in fees as well as the rate.

Chattel Mortgage vs. Traditional Mortgage

A traditional mortgage is secured by real estate: the land and whatever is permanently attached to it. A chattel mortgage is secured only by the movable item. Because personal property generally depreciates and can be relocated, lenders price in more risk, so rates are higher and terms often shorter, which pushes monthly payments up. Chattel home loans also lack many of the consumer protections that apply to real estate mortgages.

For a manufactured home, the choice can depend on how the home is set. A home permanently affixed to land the buyer owns may be titled as real property and qualify for a standard mortgage. A home on leased land usually cannot.

Related Terms Readers Confuse

Security agreement. The contract that creates the lender’s interest in personal property. It describes the same kind of secured loan, so the term is often used interchangeably with chattel mortgage.

Hire purchase and leasing. The finance company owns the asset during the contract, and the user gets title only at the end, if at all. Under a modern chattel mortgage, the buyer acquires the asset and the lender holds a security interest in it.

Chattel fee. A charge on some loan quotes, typically tied to recording or registering the lender’s lien. What it covers varies, so the lender’s itemization defines it.

Getting a Chattel Loan

Chattel loans are offered by banks, credit unions, dealers and online lenders, some specializing in one asset class such as manufactured homes, aircraft or construction equipment. The down payment depends on the program, the lender and the borrower’s credit. Under FHA Title I, borrowers with a credit score above 500 must put down at least 5%, and those with lower scores at least 10%. Lenders also weigh the asset’s value against the loan amount, the idea behind the loan-to-value ratio, along with income and existing debts.

Limitations

• Depreciation. Equipment, vehicles and many manufactured homes lose value, so a borrower can owe more than the collateral would fetch.
• Faster repossession. Repossession of personal property can move faster than foreclosure on real estate.
• Land-lease exposure. A manufactured home owner on rented land still owes lot rent and depends on the lease continuing.

Is the Interest Tax Deductible?

It can be. A manufactured or mobile home with sleeping, cooking and toilet facilities can count as a qualified home for the U.S. mortgage interest deduction, so interest on a chattel loan secured by it may be deductible like conventional mortgage interest. Owners of homes fixed to land they own may also be able to deduct property taxes. For business equipment, loan interest is generally a deductible business expense.

The Bottom Line

Chattel mortgages matter most to buyers of manufactured homes on leased land and to businesses financing equipment, vehicles or aircraft. These loans usually carry higher rates, shorter terms and fewer consumer protections than real estate mortgages, and the collateral often depreciates. Borrowers should compare offers by APR, review any chattel fee itemization and confirm whether a home affixed to owned land could qualify for a standard mortgage instead.