Igal is among millions of Americans who pursued that dream using a mortgage alternative known as a land contract, an arrangement in which buyers receive full ownership of a property only after making their final payment. But Igal lost everything he had invested when he fell behind on payments. That’s because land contracts lack many of the protections that come standard with traditional mortgages, such as a process to catch up on missed payments that can lead to loss of down payments and the home itself.
Stories like Igal’s are surfacing across cities and states as Americans seeking homeownership pursue risky financing amid a decline in the availability of mortgages for homes priced under $150,000. Financing for these low-cost homes is difficult and has become scarce as lenders struggle to originate small mortgages while still making a profit. This has led a substantial portion of homebuyers to use land contracts and other risky alternative financing arrangements, including seller-financed mortgages and lease-purchase agreements. As of 2021, 36 million Americans had purchased a home using something other than a traditional mortgage process.
Even with rising home prices and limited housing supply nationwide, a quarter of homes bought and sold each year — at least 5.3 million from 2018 to 2021 — are considered low cost. But just 26 percent of properties that sold for less than $150,000 were financed using mortgages over that same period.
Alternative financing arrangements are subject to a weak patchwork of federal and state laws. They lack standards regarding loan terms, responsibilities for taxes and upkeep, and buyer’s equity and ability to repay. And homebuyers of color rely on these arrangements more than white homebuyers. While Hispanic homeownership is rising nationwide, research from Pew demonstrates that Hispanic homebuyers are the most likely group to use alternative financing: As of 2021, 34 percent of Hispanic homebuyers have used these arrangements, compared with 23 percent of Black homebuyers and 19 percent of white homebuyers.
Mortgages remain the gold standard for home financing, as they not only enable homeownership but enhance its financial benefits. They include consumer protections that alternative financing options lack, including inspection and appraisal contingencies that ensure the homes meet minimum habitability standards. They also include a clear process for transferring the property’s title from seller to buyer, guaranteeing that borrowers can demonstrate ownership. And in the event of default, federal Consumer Financial Protection Bureau (CFPB) and state rules contain clear foreclosure and delinquency processes that give mortgage borrowers an opportunity to make any missed payments and retain their homes.
Only 21 states have substantive laws governing land contracts, and enforcement varies. But momentum for change is growing. Kansas and Minnesota passed legislation earlier this year to allow recording of land contracts and to strengthen protections for buyers, respectively. More recently, the CFPB affirmed that sellers who originate multiple land contracts per year must follow federal home financing rules, including assessing a borrower’s ability to repay. This will make land contracts safer for the millions of Americans who don’t have access to mortgages.
But even with these developments, many families who use alternative financing won’t have basic protections such as access to foreclosure processes and the equity they’ve built over time.
Congress is considering bipartisan legislation that would establish minimum protections for land contract buyers. Other federal and state initiatives can also help support Americans’ goals of homeownership: A recent Pew study helped shed light on the size of the land contract market and provides policy recommendations that lawmakers can use to make these arrangements safe. Expanding the availability of small mortgages could also help more Americans achieve homeownership. Americans shouldn’t be treated differently because of the type of financing they used to purchase their homes.
Tara Roche directs the Pew Charitable Trusts’ housing policy initiative.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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