Some Home Buyers Turn to Alternative Financing as Other Options Dwindle

In one common type of seller-financed agreement, called a “contract for deed” or a land contract, the seller extends credit directly to the buyer, who typically does not receive the deed to the property until the loan is paid. 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. The loans typically lack foreclosure protections, so buyers who fall behind in payments may risk eviction and loss of their investment if they miss a payment.

“They come with very high risk,” said Mike Calhoun, president of the Center for Responsible Lending. “They are almost always a horrible idea.”

Nontraditional financing needs further scrutiny by policymakers, Mr. Calhoun said, particularly because buyers may be increasingly forced to consider it as housing becomes less affordable.

Home prices have surged because of 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 rates and prices combined with tight inventory “are making the pursuit of homeownership the most expensive in a generation,” the mortgage finance giant Freddie Mac said.

Manufactured homes offer a large pool of unsubsidized affordable housing, but risky financing and challenges with land ownership 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 was needed to quantify how often home buyers succeeded in securing title to their homes when using nontraditional financing. In a separate report, Pew said that “virtually nothing is known about the share of families that actually end up owning their homes when using these agreements.” But it also said available evidence “clearly indicates frequent poor outcomes.” A 2012 study that focused on low-income settlements in Texas, for instance, found that fewer than 20 percent of contract-for-deed buyers made the transition to a deed.

Article source: https://www.nytimes.com/2022/04/22/your-money/house-mortgage-alternative-financing.html