Americans are using alternative financing arrangements, such as rent-to-own

CUToday

PHILADELPHIA–Many Americans are using alternative financing arrangements, such as rent-to-own, that a new report from Pew Charitable Trusts indicates are generally riskier, more costly, and subject to far weaker consumer protections and regulatory oversight than traditional mortgages.

Pew Trusts sad the “evidence suggests that a shortage of small mortgages, those for less than $150,000, may be driving some home borrowers (i.e., people who purchase a home with financing) who could qualify for a mortgage into these alternative arrangements. And other factors related to a home’s habitability and the ownership of the land beneath a manufactured home—the modern version of a mobile home—can make certain homes ineligible for mortgage financing altogether.”

According to Pew, the evidence of potential consumer harm, little is known about the prevalence of alternative financing in the U.S., primarily because no systematic national data collection exists. Pew said approximately 36 million home borrowers have used alternative financing.

‘Lack of Data’

The U.S. Census Bureau collected data on the number of Americans who reported using certain types of arrangements until 2009, and in 2019, the Harvard Joint Center for Housing Studies analyzed alternative financing in selected states that require public record-keeping, but a persistent lack of data has prevented regulators and policymakers from understanding the full scope and scale of this markets, according to Pew. To help address this evidence gap, The Pew Charitable Trusts said it conducted a nationally representative survey of U.S. adults that examined the prevalence of alternative financing and borrower demographics.

Key Findings

Among the survey’s key findings include:

• Approximately 1 in 5 home borrowers—about 36 million Americans—have used alternative financing at least once in their adult lives. Of those, Pew reported 22% have used more than one type of alternative arrangement across multiple home purchases, which suggests that some borrowers face repeated barriers to mortgage financing. It further noted use of alternative financing varied by race and ethnicity and was highest among Hispanic borrowers. 

• Roughly 1 in 15 current home borrowers—around 7 million U.S. adults—currently use alternative financing. Among borrowers with active home financing debt, those with annual household incomes below $50,000 were more likely to use alternative financing, Pew found.

“These findings underscore the urgent need for better national and state data collection that can enable regulators to fully understand the prevalence of alternative financing arrangements and ensure that tens of millions of Americans, especially those from minority and low-income communities, are not overlooked in policy decisions affecting home borrowers,” Pew Charitable Trusts said.