BUYING a home is one of the biggest purchases you can make.
Saving money during the process is ideal and avoiding a risky loan will help.
Most Americans typically use mortgages, a loan or agreement between buyer and a lender, in order to purchase a home.
Although, a report from the The Pew Charitable Trusts found that around one in five home borrowers have used alternative financing at least once.
That’s roughly 36million Americans turning to dicey financing options.
The report also showed that one in 15 home borrowers are currently using these dangerous financing options – that’s about seven million US adults.
Tara Roche, manager of the home financing project for the Pew Charitable Trusts, told The Sun that these types of financing are becoming dangerously attractive.
Folks are using riskier options because lenders are having difficulty issuing small mortgages profitably and it’s hitting certain communities harder.
Economists from the National Association of Homebuilders (NAHB) report at the beginning of 2022 that 81% of homebuyers couldn’t afford half the homes for sale in their markets.
Though housing affordability continues to climb, experts are urging potential homebuyers that these risky lending options most likely will result in foreclosures and low property values.
Dangers of alternative financing
In order to understand the perilousness of alternative financing, it must be defined first.
Financing is referring to loans that buyers must get in order to purchase a home.
These alternative loans are for those who may not meet the typical requirements of traditional mortgage loans.
The terms are different from conventional, fixed-rate mortgages and normally come with much higher interest rates, unfavorable contract terms and a higher chance of losing home equity.
Alternative financing agreements also lack the protections that traditional mortgages offer.
Tara warns that those who are considering these types of loans should consider the benefits and protections that a federally regulated mortgage can offer.
Tara Roche told The Sun: “During the pandemic, there were protections offered to renters. For example, the moratorium on eviction and assistance offered to homeowners and help with mortgages.
“They were able to pause their payments and in some instances were able to receive financial assistance, but for alternative financing borrowers, many of them did not qualify for these protections.”
These types of protections are offered specifically to mortgage borrowers and renters that others cannot get, simply because they don’t have that deed with their name on it.
Acceptable alternative financing
There are three safer options for those looking for loans elsewhere:
- Personal property loans
- Lease-purchase agreements
- Seller-financed mortgages
Personal property loans
Personal property loans are a much better option if you are looking for non-traditional loans.
These loans are a better option as they tend to be more regulated.
The Home Mortgage Disclosure Act instructs lenders who make these loans to report details for each loan application to the Consumer Financial Protection Bureau (CFPB).
These loans tend to have much higher interest rates.
Personal property loans have similar characteristics to more traditional mortgage loans.
These are typically a rent-to-own contract between tenants and landlord or seller.
Agreements like these are usually more favorable to those first-time buyers looking to save money for a down payment and need more time to build their credit.
According to Rocket Mortgage, these agreements can be the most legally-binding, so make sure that both parties are happy with the contract.
Typically, the renter will have to pay an option fee giving them exclusive rights to buy the property based on an agreed price.
Renters should include a clause stating that a portion of the rent goes toward the down payment.
They should also make sure that they can obtain a mortgage at the end of their lease or else they can lose the option to buy.
Seller financing is an agreement where the seller handles the mortgage process instead of a bank or other financial institution.
Meaning the buyer will sign a mortgage with the seller.
These are mostly for buyers who cannot find a traditional loan due to bad credit or other financial woes.
These typically come with little to no closing costs and may not require an appraisal.
Sellers are also able to be more flexible on the down payment amount.
The seller-financing process is usually much faster and can even settle within a week.
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