Some Home Buyers Turn to Alternative Financing as Other Options Dwindle

Millions of American home shoppers have taken on risky and generally more costly alternative financing, in part because even creditworthy buyers may have trouble finding traditional mortgages for lower-priced properties, new research suggests.

One in 15 current home borrowers, or about seven million Americans, uses alternative financing, including arrangements in which they make payments directly to the seller instead of to a lender, according to recent survey by the Pew Charitable Trusts. The survey also found that the use of alternative financing was highest among Hispanic borrowers and people with annual income below $50,000.

The financing arrangements often lack consumer protections available with traditional home loans and are lightly regulated by a patchwork of federal and state rules, said Tara Roche, manager of Pew’s home financing project. Adding to buyer confusion, the arrangements may have different names in different parts of the country.

The size of the alternative financing market is murky because there is no systematic national collection of data about such purchases, Ms. Roche said. In many states, the agreements don’t have to be recorded in a public registry, as conventional mortgage purchases do.

When the home financing project conducted a national survey of about 5,000 adults in June, the number who said they had used alternative financing was much higher than it had expected.

“We were very surprised to see that 36 million people have used alternative…