Financing a modular project: deposits, draws and what lenders worry about

Most of what makes modular attractive is about time. Most of what makes it hard to finance is also about time. On a site-built job, money goes out as work shows up on your land, where a lender can see it and an inspector can measure it. On a modular job, a large share of the money goes out months earlier, to a factory, for work that is sitting in someone else's building. That one difference drives almost every financing question you will run into.

Why the cash goes out earlier

A modular plant has to buy materials and set up its line for your project before it builds anything. A 2024 study by the National Renewable Energy Laboratory and the University of Nebraska-Lincoln found that materials alone can be 60 percent or more of the cost of production, and manufacturers often require deposits of 30 percent or more of the off-site contract. The same study notes that plants need frequent progress payments to keep their own cash flowing, and that manufacturers, as suppliers, discourage retainage.

So instead of a slow ramp of draws as the building rises, you face a large check up front, then steady payments while the boxes are built, all before anything is set on your foundation.

What lenders worry about

Put yourself in a construction lender's seat. Their usual comfort comes from two things: the work is on land they hold a lien on, and an inspector can confirm it before each draw. With modular, neither is true for a big part of the job. CFMA, the construction finance trade group, points out that off-site progress verification and past cases of financial distress have led some commercial lenders to reject modular projects.

The lenders that do say yes often ask the developer to carry more of the risk. According to the NREL study, that can include line reservation fees and material deposits paid 3 to 6 months before production, and because the factory portion is unsecured, interest rates may be higher and loan amounts lower.

The equity gap is real

The NREL case study modeled a 200-unit multifamily building both ways. It found the developer's equity need could be as much as 30 percent higher for modular, about $18.2 million versus $13.6 million for site-built, mostly at the start of the project. The same model showed a possible 6-month schedule savings, 15 months versus 21.

That is the trade in plain terms. You may need more cash early, and you may get the building open sooner. Whether that works for you depends on what six months of earlier rent or room revenue is worth, and what six fewer months of construction interest saves. McKinsey's research on the sector makes the same point from the other direction: modular has a track record of accelerating project timelines by 20 to 50 percent, but cost savings are still more the exception than the norm. Model the timeline and the financing together, not just the price.

Ways developers fill the gap

There is no single fix, but a few approaches come up again and again:

• Find a lender that has closed modular loans before. Ask directly how many, and ask to talk to a borrower. A lender learning modular on your project is a risk to your schedule.
• Negotiate the deposit schedule. Tie payments to milestones you can verify, like materials received, modules framed and modules inspected, rather than dates on a calendar.
• Get title or a security interest in finished modules. Ask your attorney what protects you if the plant has trouble while your modules sit in its yard.
• Use deposit financing. A small number of firms finance the factory deposits themselves. One example, Modular Capital Partners, describes its product as funding the factory deposits and progress payments that modular manufacturers require before delivery, with repayment from construction loan proceeds at module delivery. Read the terms closely and compare the cost against simply raising more equity.
• Look at state housing programs. The NREL report notes that state affordable housing agencies are attempting to address some of these barriers with housing innovation funds and loans. What exists varies a lot by state.

Single homes are simpler

If you are building one modular house rather than a 200-unit building, the picture is friendlier. Fannie Mae's Selling Guide states that modular, prefabricated, panelized and sectional homes are not considered manufactured housing and are eligible under the guidelines for one-unit properties, and that Fannie Mae gives them the same treatment as site-built housing. The home has to be real property, meet local building codes and sit on a permanent foundation.

Many buyers use a construction-to-permanent loan, which converts into a regular mortgage when the house is finished. For Fannie Mae's single-closing version, the construction period may have no single period of more than 12 months and the total period may not exceed 18 months. Modular often fits inside that window, but only if the plant slot, the site work and the set are planned together.

Questions to ask before you sign anything

• What deposit does the manufacturer require, and when is each payment due?
• Which of those payments will the construction lender fund, and which come from equity?
• How will the lender verify factory progress before releasing a draw?
• Who owns the modules before they ship, and is that written down?
• If the site is late, who pays to store finished modules, and does that money come out of the loan?
• What happens to deposits if the plant cannot deliver?

The short version

Modular moves the money earlier and away from your site. Lenders know that, and they price it. The projects that finance smoothly are the ones where the developer brings the lender in early, picks a plant the lender is comfortable with, and writes the deposit and draw schedule around milestones everyone can check. None of this is legal or financial advice, so run your structure past your lender and attorney before you commit.

Before your first call: answer six questions to pick a method, sketch a week-by-week timeline, and save companies to My Stack as you go.