Millions of U.S. homebuyers have opted for risky and generally more expensive alternative financing, in part because even creditworthy buyers can struggle to find traditional mortgages for low-priced properties, new research shows.
One in 15 current home borrowers, or about seven million Americans, use alternative financing, including arrangements in which they make payments directly to the seller rather than a lender, according to a recent survey by Pew Charitable Trusts. The survey also found that the use of alternative financing was highest among Hispanic borrowers and people with annual incomes below $50,000.
Finance deals often lack the consumer protections available with traditional home loans and are lightly regulated by a patchwork of federal and state rules, said Tara Roche, Pew’s home finance project manager. Adding to buyer confusion, arrangements may have different names in different parts of the country.
The size of the alternative finance market is unclear because there is no systematic national collection of data on such purchases, Ms. Roche said. In many states, agreements do not have to be registered in a public registry, as conventional mortgage purchases do.
When the Home Finance Project conducted a nationwide survey of around 5,000 adults in June, the number of those who said they had used alternative finance was much higher than expected.
“We were very surprised to see that 36 million people used alternative financing, spread across the United States,” Ms. Roche said.
Most Americans need mortgages to pay for their homes. But in some cases, people — or the homes they want to buy — may not qualify for a conventional mortgage. In other cases, some eligible borrowers may be pushed into alternative financing because traditional mortgages are difficult to find for amounts below $150,000, according to Pew. Lenders have little incentive to make small loans because larger loans are more profitable.
Pew found that the most common type of alternative financing was home loans or “furnishings,” which are often used to purchase manufactured homes (formerly known as mobile homes). The loans are similar to traditional mortgages, but often have much higher interest rates and shorter terms, resulting in higher monthly payments and higher interest over the life of the loan compared to home borrowers. prefabs that get mortgages. Because the loans aren’t considered traditional mortgages, they aren’t subject to foreclosure rules, and lenders can often repossess homes quickly if a borrower falls behind.
With furniture loans, the borrower typically buys the structure but leases the land underneath. Landlords – increasingly professional investors – can raise rent to levels the borrower cannot afford, leading to default.
In a common type of seller-financed agreement, called a “deed contract” or land contract, the seller extends credit directly to the buyer, who generally does not receive the deed until the loan is not refunded. Because buyers don’t have proof of ownership, their payments may not constitute the equity in the property, and it may not be clear who is responsible for taxes and repairs. Loans typically lack foreclosure protection, so buyers who fall behind in payment can risk eviction and loss of their investment if they miss a payment.
“They are very high risk,” said Mike Calhoun, president of the Center for Responsible Lending. “They’re almost always a horrible idea.”
Non-traditional financing needs to be looked at more closely by policymakers, Calhoun said, particularly because buyers may be increasingly pressured to consider it as housing becomes less affordable.
Home prices have jumped due to the lack of available properties, and now mortgage rates are rising. The average interest rate on a 30-year fixed-rate mortgage hit 5% in mid-April, the highest in more than a decade. Rising rates and prices combined with tight inventories “make home ownership the most expensive in a generation,” mortgage finance giant Freddie Mac said.
Manufactured homes offer a large pool of unsubsidized affordable housing, but risky financing and land ownership issues can undermine their potential as a solution to the housing shortage, Ms Roche said.
The industry needs “more careful oversight and regulation,” Calhoun said, if it is to be a viable “mainstream” alternative.
Here are some questions and answers about alternative real estate financing:
Can alternative financing help people become homeowners?
Pew said more research is needed to quantify how often homebuyers are successful in obtaining title to their homes when using non-traditional financing. In a separate report, Pew said “virtually nothing is known about what families end up owning their homes when using these agreements.” But he also said the available evidence “clearly points to frequent poor outcomes”. A 2012 study of low-income settlements in Texas, for example, found that less than 20% of deed-deed buyers made the transition to a deed.
How can I protect myself when using alternative financing?
If you’re considering buying with some sort of alternative financing, always look for other options, Calhoun said. Some buyers may feel intimidated seeking financing from a traditional lender, but it’s best to start there, he said: “Check with your bank or credit union.
Purchases that include both a manufactured home and the land underneath may qualify for conventional mortgages, Calhoun noted. “People need to shop around,” he said.
(More than a quarter of home loan borrowers own the land under their home and may qualify for mortgages, according to the Pew report, although they may have to navigate legal hurdles in some states.)
Sarah Bolling Mancini, an attorney at the National Consumer Law Center, said deals such as land deals carry significant risk. One way borrowers can protect themselves, she said, is to file an affidavit, or copy of the finance agreement, with a local deeds registry or county clerk’s office to document their financial interest. in the property. People can do this themselves or seek low-cost or free legal help. The federal government offers an online search tool.
What is the difference between a manufactured home and a mobile home?
While many people use the terms interchangeably, manufactured homes are manufactured homes manufactured after mid-1976 that meet construction and safety standards set by the Department of Housing and Urban Development, according to Consumer Financial Desktop protection. The mobile homes were built before 1976. The industry produces about 90,000 manufactured homes a year, according to the Manufactured Housing Institute, a trade group.