Having the funds to buy a house can be difficult and when you don’t meet the qualifications of a traditional mortgage and especially if you have bad credit. That is where alternative home financing may seem like an attractive option However, some offers are simply too good to be true, and nontraditional home loans can come with their own unique dangers.
Statistics show that Hispanic and Latino Americans who want to own a house are at an especially high risk of falling victim to hazardous home financing arrangements, so if you fall into this group, it’s important to take extra care to avoid these types of contracts. If you’re Hispanic and looking to buy a house as a first time homebuyer, here are some things to take into consideration when exploring alternative home financing options.
What is alternative home financing?
“Alternative home financing” is an umbrella term that describes any home loan not provided by a bank or other financial institution. Some common alternative home financing arrangements include:
- Rent-to-own contract: Also known as a lease-purchase agreement, a rent-to-own contract gives a renter the opportunity to buy a home from their landlord after renting it for a set period of time. During this period, the tenant makes higher rent payments, with the extra money going towards the down payment on their eventual mortgage. Then, if they are able to qualify for a mortgage at the end of the lease, they buy the house.
- Seller-financed mortgage: With a seller-financed mortgage, the buyer makes payments for a home directly to the seller instead of going through a bank. Unlike with a traditional mortgage, the buyer often does not own the home outright until they have made their final payment, making this type of loan similar to renting, with the seller effectively acting as a landlord.
- Personal loan: Personal loans can be used to fund any purchase, and while they are not typically used for real estate, some people do use them to buy homes. Loans of this type do not typically require a down payment or any form of collateral, but they usually have very short terms for repayment (1–7 years) and are not accepted by many sellers.
What makes alternative financing methods dangerous?
While the arrangements described above may seem appealing at first glance, they can be dangerous for buyers. In fact, in many cases, they don’t truly open up a path to homeownership at all—they only make buyers believe that they are homeowners.
When a buyer takes out a conventional mortgage, the home becomes their property upon closing, but this is often not the case with alternative loans. Looking at the fine print of an alternative contract will often reveal that the buyer will only obtain ownership of the home if certain conditions are met, such as paying off the loan in full.
Not truly owning a home means the buyer doesn’t get to benefit from legal protections and relief programs reserved for homeowners. This significantly increases their odds of being evicted, especially in times of financial distress, like the loss of a job or an expensive medical crisis. Ambiguous ownership can also lead to confusion when determining whether the buyer or the seller is responsible for property taxes and maintenance.
Why do Hispanic homebuyers turn to these methods?
Despite the risks, many homebuyers use alternative financing methods rather than taking out a traditional mortgage. In fact, according to a study by The Pew Charitable Trusts, 1 in 15 American homebuyers are currently funding their home through alternative loans, and 1 in 5 have used these methods at some point in their lives.
While alternative home financing is a common trend among homebuyers of all ethnicities, Hispanic Americans are the group most affected by this trend. 34% of Hispanic homebuyers have financed a home using a method other than a conventional mortgage, compared to only 19% of white Americans.
The reason for this difference is likely that Hispanic buyers tend to have less generational wealth than their white counterparts, resulting in comparatively lower incomes and less stable credit histories. This often makes it difficult or impossible for them to qualify for a traditional mortgage. Even if these buyers know the risks that come with alternative financing, they may choose to accept those risks because it’s their only realistic option for achieving homeownership.
What structural changes could solve this problem?
While the above data may make the Hispanic path towards homeownership look bleak, the good news is that things don’t always have to be this way. Hispanic Americans are projected to make up 70% of new homeowners by 2040, and the real estate industry will need to make some adjustments to accommodate that new demographic.
Some changes that could make it easier for Hispanic Americans to buy—and keep—homes include better options for down payment assistance, educational opportunities for new buyers, and different credit requirements for mortgages.
A simple way to implement that last change would be to include rent payment history on mortgage applications, which Fannie Mae and Freddie Mac loans do not currently allow. This would make the transition from renting to buying much smoother not only for Hispanic Americans, but for all responsible renters.
What should Hispanic homebuyers consider when buying?
While buying a home may become easier for Hispanic Americans in the future, that change won’t happen overnight. In the meantime, it’s important for Hispanic homebuyers to proceed with caution before signing off on any loans.
If you’re a Hispanic American who can’t qualify for a conventional mortgage, the best way to avoid the dangers of alternative home financing is to buy a home with a team of experts who have your best interests in mind. Loan contracts are often full of complex language, and it’s easy for the average person to misunderstand the terms and conditions they’re accepting by signing. Working with a home financing expert who understands the ins and outs of homebuying arrangements helps you avoid signing off on a bad deal.
BuyHouseEZ specializes in helping homebuyers who are unable to purchase a home through traditional means with our alternative lending program for home buying. Contact us today to explore your options so we can help you buy a new house of your own!