million American homebuyers have taken advantage of risky and generally more costly alternative financing, in part because even creditworthy buyers may have trouble finding conventional mortgages for lower-cost properties, new research suggests.
According to a recent survey by the Pew Charitable Trusts, one in 15 current home borrowers, or about seven million Americans, use alternative financing, including arrangements where they make payments directly to the seller instead of a lender. The survey also found that the use of alternative financing is increasing among Hispanic borrowers and those with annual incomes of less than 50.000 US dollars was the highest.
Financing arrangements often lack the consumer protections available with conventional home loans and are lightly regulated by a patchwork of federal and state regulations, said Tara Roche, manager of Pew's Housing Finance Project. Adding to buyer confusion is that the agreements may have different names in different parts of the country.
The size of the market for alternative financing is unclear because there is no systematic national collection of data on such purchases, said Ms. Roche. In many states, the agreements do not have to be recorded in a public registry like traditional mortgage purchases.
When the Home Equity Project conducted a national survey in June of about 5.000 adults, the number of those who said they had used alternative financing was much higher than expected.
"We were very surprised to see that 36 million people in the United States had used alternative financing," 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 traditional mortgage. In other cases, some eligible borrowers may be pushed toward alternative financing because it is difficult to obtain traditional mortgages for amounts under 150, according to Pew.000 U.S. dollars to find. 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 "mobile" loans, which are often used to buy manufactured homes (formerly called mobile homes). The loans are similar to traditional mortgages, but often come with much higher interest rates and shorter terms, resulting in higher monthly payments and more interest paid over the life of the loan, compared with borrowers of owner-occupied homes who obtain 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 defaults.
With chattel loans, the borrower typically buys the structure but rents the underlying land. Landowners-increasingly professional investors-can raise rents to levels the borrower can't afford, leading to default.
In a common type of seller-financed contract called a "contract for deed" or land contract, the seller makes a loan directly to the buyer, who typically does not receive the title deed 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 typically lack foreclosure protection, so buyers who default on payments 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 are almost always a terrible idea."
Nontraditional financing needs to be further examined by policymakers, Mr. Calhoun said, especially because buyers may be increasingly 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 home loan reached 5 percent in mid-April, the highest in more than a decade. Rising interest rates and prices combined with tight inventory "make the pursuit of homeownership 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 challenges can undermine their 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 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 is needed to quantify how often homebuyers managed to secure ownership of their homes when they used non-traditional financing. In a separate report, Pew said that "virtually nothing is known about the percentage of families who actually become owners of their homes when they use these arrangements." But it also said the available evidence "clearly points to frequent poor outcomes". A 2012 study that focused on low-income settlements in Texas, for example, found that fewer than 20 percent of contract buyers made the transition to a deeded home.
How can I protect myself with alternative financing?
If you are considering buying with alternative financing, you should always look for other options, Mr. Calhoun said. Some buyers may feel intimidated about 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 underlying land may be eligible for conventional mortgages, Mr. Calhoun noted. "People need to compare," he said.
(More than a quarter of personal property borrowers own the land under their homes and could be eligible for mortgages, Pews report says, though they may have to jump through legal hoops in some states.)
Sarah Bolling Mancini, an attorney with the National Consumer Law Center, said agreements like land contracts carry significant risks. One way borrowers can protect themselves is to file an affidavit or a copy of the financing agreement with a local land title office or county recorder's office to document their financial interest in the property. People can do it themselves or seek low-cost or free legal help. The federal government offers an online search.
What's the difference between a manufactured home and a mobile home?
While many people use the terms interchangeably, manufactured homes are factory-built homes manufactured after mid-1976 that meet construction and safety standards set by the Department of Housing and Urban Development, according to the Consumer Financial Protection Bureau. Mobile homes were built before 1976. The industry produces about 90.000 factory-built homes a year, says the Manufactured Housing Institute, a trade group.