Millions of American home buyers have taken on risky and often more expensive financing alternatives, in part because even wealthy buyers can have trouble finding traditional mortgages for lower-priced properties, new research suggests.
One in 15 current home borrowers, or about seven million Americans, uses alternative financing, including arrangements in which they make payments directly to the seller instead of to a lender, according to recent survey by Pew Charitable Trusts. The survey also found that the use of alternative financing was higher among Hispanic borrowers and those with annual incomes of less than $50,000.
Financing deals often lack the consumer protections available with traditional mortgage loans and are loosely regulated by a patchwork of federal and state regulations, said Tara Roche, project manager for Pew’s home finance. Adding to buyer confusion, arrangements may have different names in different parts of the country.
The size of the alternative finance market is murky because there is no systematic national collection of data on such purchases, Ms. Roche said. In many states, the agreements do not have to be recorded in a public registry, as conventional mortgage purchases do.
When the housing finance project was carried out, a poll of about 5,000 adults in June, the number who said they had used alternative financing was much higher than expected.
“We were very surprised to see that 36 million people have used alternative financing, spread across the United States,” Ms. Roche said.
Most Americans need mortgages to help pay for their homes. But in some cases, people, or the houses 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 larger amounts. under $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 is personal property or personal property loans, which are often used to purchase manufactured homes (formerly called 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 more interest paid over the life of the loan compared to manufactured home borrowers who get mortgages. Because the loans are not considered traditional mortgages, they are not subject to foreclosure rules, and lenders can often repossess homes quickly if a borrower falls behind.
With personal property loans, the borrower generally purchases the structure but rents the land below it. Landowners (professional and affordable investors) can raise the rent to levels the borrower cannot, leading to default.
In a common type of seller-financed deal, called a “deed contract” or land contract, the seller extends credit directly to the buyer, who typically does not receive a deed to the property until the loan is paid off. Because buyers lack proof of ownership, their payments may not build equity in the property and it may not be clear who is responsible for taxes and repairs. Loans generally lack foreclosure protection, so buyers who fall behind on payments may be at risk of eviction and losing their investment if they miss a payment.
“They come with a very high risk,” said Mike Calhoun, president of the Center for Responsible Lending. “They are almost always a horrible idea.”
Non-traditional financing needs more scrutiny from policymakers, Mr Calhou said, particularly as buyers may be forced to consider it as housing becomes less affordable.
Home prices have skyrocketed due to a lack of available properties, and now mortgage rates are rising. The average interest rate on a 30-year fixed-rate mortgage loan reached 5 percent in mid-April, the highest in more than a decade. Rising rates and prices combined with tight inventory “are making the search for home ownership the most expensive in a generation,” mortgage finance giant Freddie Mac said.
Manufactured homes offer a lot of unsubsidized affordable housingbut the risks and challenges related to land ownership may underwrite its potential as a solution to the housing shortage, Ms Roche said.
The industry needs “more careful oversight and regulation”, Mr. Calhoun said, if it is going to be a viable “mainstream” alternative.
Here are some questions and answers about alternative home financing:
Can Alternative Financing Help People Own Homes?
Pew said more research was needed to quantify how often homebuyers were able to secure title to their homes when using non-traditional financing. in a separate report, Pew said that “virtually nothing is known about the proportion of families that actually end up owning their homes when using these deals.” But he also said the available evidence “clearly indicates frequent poor outcomes.” 2012 study which focused on low-income settlements in Texas, for example, found that fewer than 20 percent of deed-contract buyers transitioned to a deed.
How can I protect myself when using alternative financing?
If you’re considering buying with some form of alternative financing, always research other options, Mr. Calhoun said. Some buyers may be intimidated by 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 beneath it may be eligible for conventional mortgages, Mr. Calhoun noted. “People need to shop around,” he said.
(More than a quarter of personal property loan borrowers own the land under their homes and may be eligible for mortgages, according to the Pew report, though they may have to jump through legal hurdles in some states.) .
Sarah Bolling Mancini, an attorney with the National Consumer Law Center, said arrangements like land contracts carry significant risks. One way borrowers can protect themselves, she said, is to file an affidavit, or a copy of the financing agreement, with a local deed registry or county clerk’s office to document their financial interest in the property. People can do this on their own or seek free or low-cost legal help. The federal government offers an online service research tool.
What is the difference between a manufactured home and a mobile home?
While many people use the terms interchangeably, manufactured homes are homes built in the factory after mid-1976 that meet construction and safety standards set by the Department of Housing and Urban Development, according to the Department of Housing and Urban Development.