Rising home prices and mortgage rates have made it more difficult for many first-time homebuyers and have pushed some to consider alternative forms of financing. A survey out of Pew Research found that Hispanic homebuyers are the most likely to pursue nontraditional financing, which is almost always riskier than a standard mortgage.
What the data show
According to Pew’s research, 34 percent of Hispanic homeowners used non-mortgage financing at some point in their home purchase. That includes land contracts, lease-purchase agreements, seller-financed mortgages and personal property or chattel loans, which are most common for manufactured homes.
For comparison, approximately 23 percent of non-Hispanic Black borrowers used alternative financing for their home purchases, while 19 percent of white homebuyers did the same.
The disparities in alternative financing are reflective of the disparities in the broader housing market.
— Tara RocheManager of home financing, The Pew Charitable Trusts
“It’s not always that the homeowner is not mortgage-ready,” adds Roche, an author of the research. Instead, the financial system incentivizes lenders to underwrite larger mortgages. Small-balance loans are proportionately more expensive to initiate, which means they’re less profitable — and therefore, less attractive — to most banks and other institutions.
“It’s very clear that low- to moderate-income homebuyers are the ones who are most in need of small mortgages, so it has a disproportionate impact on those folks,” Roche says. “That’s where you see the most alternative financing happen.”
Pew’s report suggests that alternative financing is most common for loans worth less than $150,000.
Risks of alternative home financing
While non-mortgage arrangements can be a path to homeownership for some, they are often riskier than traditional mortgages and usually come with fewer protections for the borrower.
“One of the most important elements is when and how legal homeownership is transferred,” Roche says. Some alternative financing arrangements, for example, prevent the buyer from legally becoming the property owner until the balance is fully paid off.
“Without the ability to demonstrate legal ownership of a home, alternative borrowers are at higher risk of eviction,” Roche says, adding that non-mortgage borrowers had fewer legal protections and relief mechanisms during the COVID-19 pandemic, too. For instance, homeowners who used alternative financing were mostly ineligible for forbearance.
How can these disparities be addressed?
Many of the policy solutions proposed to address high rates of alternative financing in the Hispanic community could benefit not just those borrowers, but lower-income homebuyers of all demographics.
Hispanic buyers are on track to represent 70 percent …….
Source: https://www.bankrate.com/mortgages/hispanic-homebuyers-risky-financing/