Alternative financing has been used by 36 million homebuyers, including 7 million who are currently using the practice to buy a home. This represents 1 in 5 and 1 in 15 borrowers respectively, according to a survey by Pew Charitable Trusts.
Alternative modes of financing include land contracts, lease-to-own agreements (known as lease-to-own), personal home loans, and seller-financed mortgages. The survey revealed that personal home loans were the most commonly used.
According to the Pew report, research indicates that alternative finance loans are generally riskier, more expensive, and subject to much weaker consumer protections and regulatory oversight than traditional mortgages.
They are also more likely to be used by minorities and low-income borrowers, according to the survey. Hispanics, with 34% of survey respondents, were the heaviest users, followed by blacks at 23% and whites at 19%.
The Pew Report asked whether disparities in the use of alternative financing reflected racial and ethnic inequalities in mortgage approval rates and loan costs, as historically Hispanic and Black borrowers are more likely to being denied mortgage applications or receiving high cost mortgages once approved.
According to the survey, 23% of respondents said they earned less than $50,000 a year, while only 3% said they earned more than $50,000.
Pew research has determined that some low-income households may use other borrowing arrangements because they cannot qualify for mortgages under current underwriting standards due to a variety of factors, including volatile income and little or no credit history. Both represent barriers to approval.
Underwriters never recognized a borrower’s demonstrated ability to make regular rent payments as proof that they could handle comparable mortgage payments.
The report concluded that the findings highlight disparities by race, ethnicity and income that reflect broader inequalities in the mortgage market. He also found that the scarcity of information about the prevalence of alternative finance and who uses it and why, has left millions of borrowers at risk.