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 Charitable Trusts found that Hispanic homebuyers are the most likely to pursue nontraditional financing, which is almost always riskier than a standard mortgage.
According to Pew’s research, 34% 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% of non-Hispanic Black borrowers used alternative financing for their home purchases, while 19% of white homebuyers did the same.
“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% of all new homeowners by 2040, but homeownership for this group could look a little different, says Jun Zhu, a clinical assistant professor at the Kelley School of Business at Indiana University and a non-resident fellow at the Urban Institute.
Hispanic buyers tend to have lower credit scores and income and less family wealth, and are more likely to live in intergenerational households than their white counterparts, according to Zhu.
In order to make homeownership more accessible, Zhu says, local, state and national governments should work to expand down payment assistance and homebuyer education.
“Affording the down payment is very challenging” for buyers who have less generational wealth behind them, Zhu says, so “increasing the visibility and opportunities for education” is an important way to address that disparity.
Zhu adds that reimagining the credit and income verification systems for mortgages could help more people achieve homeownership.
“Can we also take a look at on-time rental payments?” Zhu says. “Can we take a look at other incomes? (Hispanic borrowers) are very likely to be employed in the gig economy, which means they are more likely to have a 1099 instead of W-2. Unfortunately, 1099 income is very difficult to take into account for the mortgage application. Can we change that?”
Fannie Mae and Freddie Mac, which back the majority of mortgages in the U.S., do now allow for rent payment history on loan applications, though it’s unclear how well-publicized or put in practice that move is.
For gig workers, lenders generally tend to be wary of income that can appear inconsistent compared to a regular salary.
Finding a way to consider the incomes of those who might live in the home but not be on the mortgage would also benefit those who live in larger, intergenerational households.
Without these solutions, many homebuyers will have to continue scraping together financing through riskier alternative means.
“Because Latinos have such a strong desire for homeownership, they are sometimes willing to take on more risky financing to achieve it,” said Gary Acosta, co-founder and CEO of the National Association of Hispanic Real Estate Professionals, in a statement.
“What matters most is that every borrower, whether Latino or not, should always receive the most competitive financing that is available to them.”
Advice to get mortgage-ready
No matter how you identify, financing the purchase of a home is a long process.
You can help streamline things and save yourself money in interest if you work to boost your credit score well before you apply, and budget for your home purchase ahead of time.
Unfortunately, not all aspects of home financing are in your control, however.
Mortgage rates and property prices are determined by the invisible hand of the market, and it can be harder for first-time buyers who don’t come from home-owning families to compete.
“Parental homeownership is very important,” Zhu says. “We find that legacy helps a lot in homeownership.”
The existing housing finance system encourages lenders to underwrite high-value mortgages, leading many lower-income buyers to consider alternative financing.
Hispanic buyers are especially likely to finance their purchase through a means other than a traditional mortgage, which can increase the risk of foreclosure and overall cost to purchase.
Experts say a broad reimagining of the mortgage market is necessary to fully address these disparities.
In the meantime, the Hispanic homeownership rate continues to surge.
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