Unconventional Homeownership Trends
Unconventional mortgages, rent-to-own ownership, and shared-equity ownership are trends around unconventional forms of homeownership in the United States. Below is an overview of the findings.
- The National Association of Home Builders (NAHB) classifies unconventional mortgages as "loans insured by the Federal Housing Administration (FHA), VA-backed loans, cash purchases, and other types of financing such as the Rural Housing Service, Habitat for Humanity, loans from individuals, state or local government mortgage-backed bonds."
- Unlike conventional mortgages, unconventional mortgages are usually designed to cater to individuals who do not meet conventional income or loan credit requirements. These include commissioned or seasonal earners as well as borrowers with significant assets but insufficient documentable income.
- Simply put, unconventional mortgages are forms of financing that allow individuals who cannot prove a steady stream of income due to lack of a "well-documented financial history" to provide "alternative methods of verifying cash flow or assets requisite to getting a loan approved."
- According to the (NAHB), unconventional mortgages constituted "28.6% (compared to 71.4% for conventional financing)" of new-home financing in 2019, much more than in previous years. The Department of Veteran Affairs reported that there was a 14% increase in the quantity of VA-backed loans among active military and Gen Y veterans. The Wall Street Journal reported that unconventional mortgages hit a record high in 2018 since the 2008 financial crisis.
- The rent-to-own model entails committing to rent a property for a "specific period with the option of buying it before the lease runs out." The agreement usually includes a standard lease agreement and an option to purchase the property later on.
- The buyer pays non-refundable upfront fees referred to as the option money, option fee, or option consideration. This usually ranges from 2.5% to 7% of the buying price and it is what gives the buyer the option to purchase the house in the future.
- With lease-purchase contracts, the rent is typically higher than the going rate because a "portion of each payment is applied to the eventual purchase price."
- The rent-to-own trend is being driven by startups Homes which are making waves by addressing and eliminating the biggest barrier to home ownership (down payments) in the United States, at least according to 41% of Americans. Other startups such as ZeroDown and Divvy are purchasing homes on behalf of clients and then renting them to their clients under an arrangement that allows consumers to build up equity for an eventual purchase.
- The shared-equity model entails housing co-ops and community land trusts. Housing co-ops and community land trusts (CLTs) are alternative home-ownership models that provide benefits that are not offered by traditional markets such as "long-term housing affordability and the ability for low and moderate-income families to build equity."
- A housing co-op is an organization of residents living in multi-family units in which each family/household owns a part/share of the building. Shares are "sold at market rates, or below market rates in limited-equity co-ops, where the co-op recoups a percentage of equity earned on every transaction in order to subsidize the next shareholder." In housing co-ops, buyers do not own the house but rather they own shares to the building the same way shareholders own shares to a company.
- Community land trusts are nonprofit, community-run landholding organizations that sell the units built on the land that they own, usually with the intention of maintaining affordability in perpetuity. In CLTs, households lease homes for up to 99 years as opposed to traditional buying agreements. They are free to sell their homes and receive up to 70% of the appreciation.
- The growth of shared-equity homes has been driven by the worsening of housing affordability in the United States. Currently, there are about one million housing co-ops in the United States, 50% of which are located in New York. There are almost 300 CLTs in the U.S. owning about 20,000 rental and "15,000 home ownership units."