Alternative financing has been used by 36 million homebuyers, including 7 million who are currently using the practice to purchase a home. That amounts to 1 in 5 and 1 in 15 borrowers, respectively, according to a survey conducted by the Pew Charitable Trusts.
Alternative financing arrangements include land contracts, lease-purchase agreements (known as rent-to-own), personal property loans, and seller-financed mortgages. The survey found that personal property loans were the most commonly used.
According to the Pew report, research indicates that alternative financing loans are generally riskier, more costly, and subject to far weaker consumer protections and regulatory oversight than traditional mortgages.
They are also more likely to be used by minorities and lower income borrowers, the survey said. Hispanics, at 34% of the respondents to the survey, were the biggest users, followed by Blacks at 23%, and whites at 19%.
The Pew report questioned whether the disparities in the use of alternative financing reflected racial and ethnic inequalities in mortgage approval rates and loan costs because, historically, Hispanic and Black borrowers are more likely to have mortgage applications denied or receive high-cost mortgages when approved.
According to the survey, 23% of respondents said they made less than $50,000 a year, while only 3% said they made more than $50,000.
Pew’s research determined that some low-income households may use alternative borrowing arrangements because they can’t qualify for mortgages under the current underwriting standards due to a variety of factors, including volatile incomes and little or no credit history. Both represent barriers to being approved.
Underwriters have historically not recognized a borrower’s demonstrated ability to make regular rent payments as evidence that they could manage comparable mortgage payments.
The report concluded that the findings highlight disparities by race, ethnicity, and income that reflect broader inequalities in the mortgage market. It also found that scarce information about the prevalence of alternative financing and who uses them and why, has left millions of borrowers at risk.
