Hispanic homeownership has steadily increased since the late 1990s. In 2021, 48.4% of the Hispanic population owned a home. Many of these homebuyers took advantage of new and affordable mortgage products such as Federal Housing Administration (FHA) and Department of Veteran Affairs (VA) loans.

Hispanic borrowers face a higher denial rate for both traditional and nontraditional loans, leaving many to pursue alternative financing options. In fact, more than one-third of Hispanic homeowners report using alternative financing to purchase their homes, more than any other group of homebuyers. But these options come with their fair share of risk.

We’ll go over what is alternative home financing, the most typical types of alternative home finances, and the risks involved in buying a home with these types of financing options.

Why alternative financing is risky

“Alternative home financing” refers to a number of financial arrangements to purchase a home outside of traditional financial institutions like banks, credit unions, or conventional lending companies.  

These types are loans are home-only loans and personal loans for mobile homes, contract for deed loans, and rent-to-own and lease-purchase agreements, While these lending options can increase access to homes, they come with fewer consumer protections against evictions and foreclosures. Hispanic families might be able to get into their new house faster using these options, but they will find themselves with fewer financing options if they hit hard times and struggle to pay their mortgage. Here’s what you need to know about each of the above loan options:

Home-only and personal loans. Home-only, sometimes called chattel loans and personal loans, are common options for people trying to purchase mobile homes. Manufactured homes make up about 5.4% of homeownership in the country, with Hispanic homeownership owning 13% of all manufactured homes and 17% of mobile park residents.

These loans have few consumer protection laws than conventional mortgages. This means that a buyer may have fewer options to keep their home if they fall behind on payments with a home-only loan. Additionally, home-only loans typically come with higher interest rates and shorter terms and may carry additional fees or restrictions that may not be beneficial to the borrower.  

Contract for deed loans. Contract for deeds is real estate transactions without a lender, directly between a buyer and a seller. This means the seller is acting as the lender.  Sometimes called an installment purchase contract, the buyer makes payments directly to the lender, in this case, the seller. This type of transaction has fewer legal rules that conventional real estate lending.  

For example, many of these homes are sold as-is, bypassing the stricter lender appraisal and inspection requirements. So, if you run into problems with your home, you may have limited legal options. Many of these contracts also have a balloon payment.  

Because these contracts have the same options or legal protection as conventional home loans, the seller can begin the eviction process, and the lender can begin the eviction process if you miss a single payment.  If this happens, the borrower must vacate the home typically within 60 days and likely forfeit all the money paid for it.  

Rent-to-own and lease purchase agreements. These agreements often require the buyer to make more expensive payments than a traditional mortgage. Like the options above, the buyer can also encounter hidden fees, balloon payments, and other stipulations with terms that are difficult to fulfill. If you decide not to buy the property, you may forfeit the extra money you paid (option money and rent credit) and legal obligations to purchase the property.  

How to qualify for a traditional mortgage?  

Traditional mortgages provide greater rights and protections for borrowers.  

If you’ve been denied a traditional loan for a home purchase, review the denial letter to understand why. Consider asking the lender if there is documentation you can provide to strengthen your application. You may also want to speak with a HUD housing counselor or a credit counselor, who can provide help free of charge.  

There are a few actions you can take, even in the short term, to improve your strength as a borrower. You can start by reviewing your credit report to identify errors and address any issues that may be negatively impacting your score, which is used to determine whether you qualify for a mortgage. Increasing the number of timely payments and reducing your debt will also help increase your score. How long it takes to improve your credit score depends on the reason for the low credit score ranging from a few months to a few years. A rule of thumb is to have a minimum credit score of at least 620 to qualify for a conventional mortgage and a credit score of 740 to get a favorable interest rate.  

Building a banking relationship by having a bank account and using banking products responsibly can help increase your access to financial services, but it’s also important to research other lenders, such as credit unions and FHA and VA loans. When you decide to reapply for a mortgage, contact at least three lenders. Since many credit inquiries can negatively impact your credit score, a rule of thumb is to shop for loans in a short period, ideally within 2 weeks (although some suggest you can stretch this out to 45 days).  In most cases, this shows up, so the credit pulls show up as one inquiry.

Reviewing your options and understanding the pros and cons of home financing empowers you to make the most informed decision. Most importantly, it prevents your dreams of homeownership from becoming a nightmare.

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