Creditworthy buyers across the U.S. are having trouble finding traditional mortgages for lower-priced properties, causing millions of Americans to turn to risky and more costly alternative financing, The New York Times reports. Roughly seven million current home borrowers are using alternative financing to make payments directly to sellers without facing state and federal regulations, but also missing in those transactions are consumer protections available with traditional home loans.
Popular types of alternative financing like “chattel” loans can be used to buy manufactured homes, but they carry much higher interest rates and shorter terms than traditional mortgages, resulting in higher monthly payments and greater interest paid over time.
In one common type of seller-financed agreement, called a “contract for deed” or a land contract, the seller extends credit directly to the buyer, who typically does not receive the deed to the property until the loan is paid. Because buyers lack proof of ownership, their payments may not build equity in the property, and it may not be clear who is responsible for taxes and repairs. The loans typically lack foreclosure protections, so buyers who fall behind in payments may risk eviction and loss of their investment if they miss a payment.
“They come with very high risk,” said Mike Calhoun, president of the Center for Responsible Lending. “They are almost always a horrible idea.”