Earlier this year, ProPublica reported the story of aspiring homeowners like Abdinoor Igal and other members of Minnesota’s Somali American community who risked their financial well-being to pursue what many consider the key to unlocking the American dream: becoming a homeowner.
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 invested when he fell behind on payments— because land contracts lack many of the protections that come standard with mortgages, such as a process to catch up on missed payments, which can lead to loss of down payments and the home itself.
Stories like Igal’s are surfacing in cities and states, especially across the Midwest, as Americans seeking the benefits of home ownership pursue risky financing amidst a decline of mortgages for homes priced under $150,000. Financing for these homes, defined by The Pew Charitable Trusts as low-cost homes, is difficult and has become scarce as lenders struggle to originate small mortgages while still making a profit. This, in turn, has led some homebuyers to enter into land contracts and other risky alternative financing arrangements, including seller-financed mortgages and lease-purchase agreements. In total, 36 million Americans, or approximately 1 in 5 homeowners, as of 2021 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% of properties that sold for less than $150,000 were financed using mortgages over that same time. This means that many qualified and mortgage-ready borrowers—especially Black, Hispanic, and Indigenous people, and people living in rural communities—are unable to use mortgages to purchase low-cost homes.
As a result, many families turn instead to alternative financing arrangements that are subject to a weak patchwork of varying federal and state laws. That means they lack standards regarding loan terms, responsibilities for taxes and upkeep, and buyer’s equity and ability to repay—leaving some buyers unable to ever achieve their goal of owning a home. And some homebuyers of color rely on these arrangements more than White homebuyers. While data shows that Hispanic homeownership is rising across the country, research from Pew demonstrates that Hispanic homebuyers are the most likely group to use alternative financing: As of 2021, 34% of Hispanic homebuyers have used these arrangements compared with 23% of Black homebuyers and 19% of White homebuyers.
Mortgages remain the gold standard for home financing as they not only enable homeownership but enhance its financial benefits. They also come with consumer protections that alternative financing lacks—including inspection and appraisal contingencies that ensure that the homes meet minimum habitability standards and that the sale price reflects the home’s true market value. They also include a clear process for transferring the property’s title from seller to buyer, which is a crucial step in guaranteeing that borrowers can demonstrate ownership of their property. And in the event of default, 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.
To ensure that homeownership can become a reality for families, alternative financing might bring this aspiration within reach for borrowers who previously had little chance of owning a home. On the other hand, some buyers who use alternative financing still don’t obtain their goal of homeownership, even after investing tens of thousands of dollars.
To ensure alternative financing results in homeownership for families, these financial products can—and should—be made safer. Only 21 states have substantive land contract laws, 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. The bureau’s move is a major step toward leveling the field for homebuyers by making land contracts safer for the millions of Americans who don’t have access to mortgages.
But even after these developments, millions of families who use alternative financing methods will continue their homeownership journey without basic protections such as foreclosure process and protection of equity the homeowner has built over time.
Congress is considering bipartisan legislation that would establish minimum protections for land contract buyers nationwide. And other initiatives at the federal and state levels can help support Americans’ goals of homeownership. A Pew study released last month 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 more small mortgages could also help more Americans achieve homeownership.
Whether they use a mortgage or an alternative, Americans shouldn’t be treated differently because of the type of financing they used to finance their homes. Families deserve a fair shot at the American dream, as they take on what is likely to be the largest purchase they will ever make—one that will affect their families now and for generations to come.
Tara Roche directs The Pew Charitable Trusts’ housing policy initiative.
This op-ed was first published in Governing on September 23, 2024.