Millions of homebuyers have been warned about risky loans that could mean you’ll never own a home

Buying a home is one of the biggest purchases you can make.

Saving money during the process is ideal, and avoiding a risky loan helps.

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Risky lending options will most likely lead to foreclosures and low property values

Most Americans typically use a mortgage, a loan, or an agreement between the buyer and the lender to buy a home.

However, a report by The Pew Charitable Trusts found that about one in five borrowers has used alternative financing at least once.

That’s roughly 36 million Americans turning to tight financing options.

The report also showed that one in 15 home borrowers is currently taking advantage of these dangerous financing options — that’s about seven million US adults.

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Tara Roche, manager of the home equity financing project for the Pew Charitable Trusts, told The Sun that these types of financing are becoming dangerously attractive.

People are using riskier options because lenders are having trouble making small mortgages profitable and certain communities are being hit harder.

Economists at the National Association of Homebuilders (NAHB) report in early 2022 that 81% of homebuyers could not afford half of the homes for sale in their markets.

Although housing affordability continues to rise, experts are urging potential homebuyers that these risky borrowing options will most likely result in foreclosures and low home values.

Dangers of alternative financing

In order to understand the danger of alternative financing, it must first be defined.

Financing refers to the credit that buyers must obtain in order to purchase a home.

These alternative loans are designed for those who may not meet the typical needs of traditional mortgage loans.

The terms differ from traditional fixed-rate mortgages and typically come with significantly higher interest rates, less favorable contract terms, and a greater likelihood of losing home equity.

Alternative financing arrangements also lack the protection that traditional mortgages offer.

Tara warns that those considering this type of loan should consider the benefits and protection that a state-regulated mortgage can offer.

Tara Roche told The Sun: “Protections have been offered to renters during the pandemic. For example the moratorium on evictions and homeowner assistance and mortgage assistance.

“They were able to pause their payments and, in some cases, receive financial assistance, but for alternative finance borrowers, many of them did not qualify for that protection.”

This type of protection is specifically offered to mortgage borrowers and tenants who others cannot obtain simply because they do not have that deed in their name.

Acceptable alternative financing

There are three safer options for those looking elsewhere for credit:

  • personal loans
  • hire-purchase agreements
  • Vendor-financed mortgages

personal loans

Personal real estate 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 directs lenders making these loans to report details of each loan application to the Consumer Financial Protection Bureau (CFPB).

These loans usually have significantly higher interest rates.

Personal real estate loans have characteristics similar to more traditional mortgage loans.

hire-purchase agreements

This is usually a hire-purchase agreement between the tenant and the landlord or seller.

Arrangements like these are typically more affordable for first-time buyers who want to save money on a down payment and need more time to build their credit rating.

According to Rocket Mortgage, these agreements can be the most legally binding, so make sure both parties are happy with the contract.

Typically, the tenant must pay an option fee that gives them the exclusive right to purchase the property based on an agreed price.

Renters should include a clause stating that part of the rent will be used for the down payment.

You should also make sure they can get a mortgage at the end of their lease, otherwise they could lose the option to buy.

Vendor-financed mortgages

Seller financing is an arrangement where the seller handles the mortgage process instead of a bank or other financial institution.

This means that the buyer takes out a mortgage with the seller.

These are mainly for buyers who cannot find a traditional loan due to bad credit or other financial problems.

These typically have little to no closing costs and may not require an assessment.

Sellers are also able to be more flexible with the amount of the down payment.

The seller financing process is usually much quicker and can even be completed within a week.

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