Risky financing for home purchase


**Millions of Americans Have Used Risky Financing Arrangements to Buy Homes**
**Nationally representative survey finds disparities by race, ethnicity, and income in potentially harmful borrowing**
**Pew Trusts Research, April 14, 2022**

**Most homebuyers in the U.S. use mortgages to purchase their homes. However, many others use alternative financing arrangements, such as rent-to-own, that research indicates are generally riskier, more costly, and subject to far weaker consumer protections and regulatory oversight than traditional mortgages. Evidence suggests that a shortage of small mortgages, those for less than $150,000, may be driving some home borrowers (i.e., people who purchase a home with financing) who could qualify for a mortgage into these alternative arrangements. And other factors related to a home’s habitability and the ownership of the land beneath a manufactured home — the modern version of a mobile home — can make certain homes ineligible for mortgage financing altogether.**

**Approximately 1 in 5 home borrowers — about 36 million Americans — have used alternative financing at least once in their adult lives. Of those, 22% have used more than one type of alternative arrangement across multiple home purchases, which suggests that some borrowers face repeated barriers to mortgage financing.**

**Roughly 1 in 15 current home borrowers — around 7 million U.S. adults — currently use alternative financing. Among borrowers with active home financing debt, those with annual household incomes below $50,000 were more likely to use alternative financing....** [end quote]

The article describes different types of alternative financing. Minorities (Hispanic, Black, Indigenous) are more likely to use them. These can be riskier and more costly.

The numbers are large enough to make it a Macro issue.



I could find no bank or credit union that would issue me a mortgage for the paltry $27,000 that I needed to close on a property in rural Missouri.*

I had to use “risky-alternate” financing in the form of a used car loan.

Luckily, my 6 year old Taurus could be used for 175% of book value at the time to cover it.

Talk about risky. I could just surrender the car and walk away from the debt and get the house for residual value on the car (about $15,000 at the time). Whadadeal!

Around that same time period, my mother did the exact same thing for a property a couple of blocks over and used a car that was 12 years old.

My family has been using owner finance to buy and sell property for decades because of poor/no coverage by “traditional” methods. Out of dozens of transactions, we’ve only had to repossess the property 1 time. The down payment was 5% and covered ‘make-ready’ repairs to resell after the rent-to-owner default.

*I could have just paid cash, but then I wouldn’t have been able to take advantage of investment gains and a 1.99% APR used car loan, either. Also, see taxable events and individual brokerage accounts.


Most people are rational. I know it doesn’t seem that way sometimes, but at the core most people are rational. If you look closely at this cohort of people (who use alternative financing), they are in a position of having fewer choices than people outside this cohort. So, look closely, they have the choice of buying a property using alternative financing with higher risk, or they have the choice of not buying and having to rent “forever”. And with rents mostly rising, and recently rising rapidly, perhaps taking that risk is a good bet?


Most people are rational.

… most of the time.

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