What Is a Chattel Mortgage?

A chattel mortgage is a loan to purchase movable personal property, such as a manufactured home or construction equipment. The property, or chattel, secures the loan, and the lender holds an ownership interest.

Chattel loans are commonly referred to as security agreements. The terms “personal property security,” “lien on personal property,” or even “movable hypothecation” are other synonyms for a chattel mortgage.

Types of Chattel Mortgages

Borrowers secure chattel mortgages to purchase the moveable property. These loans tend to have shorter terms than regular mortgages. If a borrower defaults on a chattel mortgage, the creditor or lender can take possession of the financed property and sell it to pay off the loan.

Mobile/Manufactured Home Loans

Chattel mortgages finance mobile or manufactured homes on leased land. Borrowers cannot opt for a traditional mortgage since the land does not belong to the homeowner. Instead, the mobile or manufactured home is considered “personal movable property” and security for a chattel mortgage. The financing arrangement remains in effect even if the mobile home is moved to a different location.

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 all have programs to guarantee manufactured home loans issued by approved private lenders to eligible borrowers. HUD guarantees loans for manufactured homes without land through its Federal Housing Administration (FHA) Manufactured Home Loan Insurance program.

Equipment Loans

Businesses use chattel mortgages to purchase new or used heavy equipment for construction, farming, or other purposes. A chattel mortgage allows the buyer to use the equipment while the lender retains an ownership interest. The lender can repossess the equipment and sell it to pay off the loan balance if the buyer defaults.

The U.S. Small Business Administration provides low-cost financing for business-related equipment. Like other government agencies, it doesn’t issue loans but guarantees eligible loans issued by an approved list of commercial lenders. Its 504 Loans provide funding for long-term machinery and equipment purchases.

Chattel Mortgage vs. Traditional Mortgage

A chattel mortgage differs from a traditional mortgage in that the lender owns the property until it the borrower has fully paid the loan. With a regular mortgage, the lender isn’t the owner but holds a lien on the property, allowing them to take possession of it in the event of a default. With a chattel mortgage, ownership transfers to the buyer at the end of the mortgage term, assuming all the payments have been made.

Chattel mortgages tend to carry higher interest rates and have fewer consumer protections than regular mortgages. They also have shorter terms, so monthly payments may be higher.

Examples of Chattel Loans

Vehicles, airplanes, boats, farm equipment, and manufactured homes are common examples of assets often financed with a chattel loan. Approximately 42% of the loans used to purchase manufactured homes are chattel loans, according to the Consumer Financial Protection Bureau (CFPB).Chattel loans have specific rules, which vary according to the property and state or federal law.

In Florida, chattel home loans must be registered in a public registry so that third parties can be aware of them before entering into financing agreements with potential borrowers who want to put up the property as security for another loan. For security agreements associated with aircraft, chattel mortgages must be recorded with the Aircraft Registration Branch of the Federal Aviation Administration.

The Bottom Line

A chattel mortgage is a loan to purchase movable personal property, such as construction equipment or mobile homes. Chattel mortgages often carry higher interest rates and have fewer consumer protections than traditional mortgages. If a borrower defaults on a chattel mortgage, the lender can repossess the property or equipment.