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Some desperate homebuyers resort to risky financing

On Behalf of | Apr 27, 2022 | Real Estate |

Real estate values have continued to climb in recent years. While this was often in major metropolitan areas like Denver, remote work from home during the pandemic has prompted homeowners and renters also to seek out new or larger suburban and rural spaces driving up values in these formerly affordable areas.

For years, buyers knew that the prices were high, but the mortgage rates were low. This all changed in the last year, with mortgage interest rates going from 3% to over 5%. While this may not seem like a big deal, it’s adding hundreds of dollars to the buyer’s monthly payments as they face inflation, which means their paychecks are not going as far. Sellers are also finding that they are getting offers over their asking prices because of the tight market.

It all adds up to desperate times for home buyers. It can mean buying a smaller property because that is now what they can afford or spending more than they wanted to get what they needed.

Risky business

Some find that they are now stuck with a prohibitively high mortgage. In hopes of finding a deal, other buyers are looking at other options. Unfortunately, these alternative deals often prey on families who can least afford to take financial risks, particularly folks in rural areas and people of color.

According to a Pew Charitable Trusts survey, 36 million Americans have tried these alternative arrangements at some point or another, with seven million currently in such an arrangement. Common examples include:

  • Deals not recorded in a government or municipal office
  • Financing that does not use a reputable bank or mortgage company (thus avoiding regulations)
  • Handwritten contracts that have no legal standing
  • Verbal agreements that are not binding

These deals offer few financial protections, and families also don’t enjoy such homeowner benefits as tax breaks, a normal foreclosure process, and protection from evictions during the pandemic. Even if the seller is responsible and doesn’t allow a property to go into foreclosure while collecting payments from the buyer, they still hold the property deed until the home is paid for. If the buyer misses payments, the owner can evict them. Some property owners resell the same property again and again.

Things could get better

In light of this predatory lending, states and legal groups are exploring options to hold fraudulent sellers accountable for their actions. In the meantime, all homebuyers need to go over their transaction with an attorney, particularly if the seller prefers to use one of the risky approaches listed above.