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Rising mortgage rates prompt buyers to seek alternative financing

Rising home prices and mortgage rates have made it harder for many first-time homebuyers and prompted some to consider other forms of financing.

A survey by Pew Charitable Trusts found that Hispanic homebuyers are most likely to seek non-traditional financing, which is almost always riskier than a standard mortgage.

According to Pew research, 34% of Hispanic homeowners have used non-mortgage financing at some point when purchasing their home.

This includes land contracts, lease-purchase agreements, seller-financed mortgages, and real estate or furniture loans, which are most common for manufactured homes.

By comparison, about 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 owner is not ready for the mortgage,” adds Roche, author of the research.

Instead, the financial system incentivizes lenders to take out larger mortgages.

Low balance loans are proportionally more expensive to originate, which means they are 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 most in need of small mortgages, so this has a disproportionate impact on those people,” Roche said. “That’s where you see the most alternative financing happening.”

The Pew report suggests alternative financing is most common for loans worth less than $150,000.

Risks of alternative real estate financing

Although non-mortgage arrangements can be a route to home ownership for some, they are often riskier than traditional mortgages and generally offer fewer protections for the borrower.

“One of the most important things is when and how legal ownership is transferred,” Roche says.

Some alternative financing methods, for example, prevent the buyer from becoming a legal owner until the balance is fully paid off.

“Without the ability to demonstrate legal ownership of a home, alternative borrowers face a higher risk of eviction,” Roche says, adding that non-mortgage borrowers also had fewer legal protections and relief mechanisms during the mortgage. COVID-19 pandemic.

For example, owners who used alternative financing were mostly not eligible for forbearance.

How can these disparities be addressed?

Many of the policy solutions proposed to address the high rates of alternative financing in the Hispanic community could benefit not only these borrowers, but also low-income buyers from all demographic groups.

Hispanic buyers are on track to make up 70% of all new homeowners by 2040, but homeownership for this group could be a little different, says Jun Zhu, assistant clinical professor at the Kelley School. of Business from Indiana University and a non-resident. at the Urban Institute.

Hispanic buyers tend to have lower credit scores and incomes 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.

“Being able to downpay is very difficult” for buyers who have less generational wealth behind them, Zhu says, so “increasing visibility and educational opportunities” is an important way to address this disparity.

Zhu adds that reinventing credit and income verification systems for mortgages could help more people access homeownership.

“Can we also take a look at the on-time lease payments?” Zhu said. “Can we take a look at the other income? [Hispanic borrowers] are very likely to be employed in the gig economy, which means they are more likely to have a 1099 instead of a W-2. Unfortunately, 1099 income is very difficult to consider when applying for a home loan. Can we change this?

Fannie Mae and Freddie Mac, who back the majority of mortgages in the United States, now allow rent payment history on loan applications, although it’s unclear how well-known or put into practice.

For gig workers, lenders generally tend to be wary of income that may seem inconsistent with a regular salary.

Finding a way to account for the incomes of those who might live in the house but not be on the mortgage would also benefit those who live in larger intergenerational households.

Without these solutions, many buyers will have to continue to find financing through riskier alternative means.

“Because Latinos have such a desire for homeownership, they are sometimes willing to take on riskier financing to achieve it,” said Gary Acosta, co-founder and CEO of the National Association of Homeowners. real estate, in a statement.

“What matters most is that every borrower, whether Latino or not, always receives the most competitive financing available to them.”

Tips for preparing your mortgage

No matter how you identify yourself, financing a home purchase is a long process.

You can help streamline things and save money in interest if you work to improve your credit score well before you apply and budget for your home purchase in advance.

Unfortunately, not all aspects of home financing are within your control.

Mortgage rates and home prices are determined by the invisible hand of the market, and it can be more difficult for first-time buyers who are not from homeowner families to compete.

“Parental homeownership is very important,” Zhu says. “We find that inheritance helps a lot in home ownership.”

At the end of the line

The existing housing finance system encourages lenders to take out high-value mortgages, leading many low-income buyers to consider alternative financing.

Hispanic buyers are particularly likely to finance their purchase by means other than a traditional mortgage, which can increase the risk of foreclosure and the overall cost of purchase.

Experts say a vast reinvention of the mortgage market is needed to fully address these disparities.

In the meantime, the homeownership rate for Hispanics continues to rise.