Nearly two decades after the housing crash prompted regulators and lenders to impose tighter mortgage standards, the pendulum may have swung too far.
New research published Monday by The Pew Charitable Trusts found that restrictive access to traditional mortgages drives some homebuyers toward costlier, higher risk alternative financing, such as land contracts.
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“We’ve been talking kind of broadly about the housing shortage,” said Seva Rodnyansky, a research manager for housing policy at Pew and co-author of the study.
But the new findings, he told Straight Arrow, highlight “a financing shortage too.”
Rise of land contracts
Pew found that the use of land contracts is on the rise, particularly concentrated in the Midwest.
A land contract works differently from a traditional mortgage. Instead of borrowing from a bank or other lender, the homebuyer typically makes a down payment directly to the seller and then pays the seller in installments. But unlike a mortgage, the contract does not generally give the buyer legal title to the home until the entire debt has been paid off.
Nationally, fewer than 1% of homes are financed with land contracts. But in states like Michigan, Pew found, the rate has risen to about 3%.
Those figures are almost certainly undercounts, the report stated, because many states do not require sellers to publicly record these financing arrangements and recording requirements are often poorly enforced.
Higher risks
Land contracts, like other alternative financing arrangements, are usually riskier for buyers than traditional mortgages.
“There’s certainly land contracts that work out just fine,” Rodnyansky said, “but it’s a product that carries less consumer protections overall than mortgages.”
For example, these contracts often include fees and balloon payments that require buyers to come up with a large lump sum after years of smaller monthly payments. Buyers can also be responsible for a home’s upkeep without the protections and benefits of owning the legal title.
“Land contracts are inherently risky,” said Sarah Bolling Mancini, managing director of advocacy at the National Consumer Law Center, who focuses on foreclosures, mortgage lending and credit reporting issues.
“The structure of the transaction means that if a homebuyer defaults on their payments, they lose everything they have invested in the home — often tens of thousands of dollars,” Mancini told Straight Arrow.
The legal protections available to buyers vary by state, but they are generally weaker than those governing mortgages.
“In Michigan, we’ve seen that land contracts can play a critical role in helping low-income buyers access homeownership,” said Libby Benton, director and consumer law attorney at the Michigan Poverty Law Program. “At the same time, they can be used in ways that are predatory and harm potential buyers and neighborhoods.”
Benton said her organization sees contracts carrying high interest rates, fees and balloon payments, while placing responsibility for repairs and maintenance on buyers who may lack the money to cover them.
“And missing a single payment can put buyers at risk of losing their equity and housing,” she said.
Tightening mortgage standards
The rise of land contracts and other financing alternatives feeds into a broader debate over whether policymakers overcorrected after the 2007-09 housing crisis.
Earlier this month, Pew released a separate report arguing that mortgage lending standards have become too tight and are shutting some otherwise qualified borrowers out of the market. Young adults, Black and Hispanic households, low- and moderate-income borrowers and rural Americans are disproportionately affected, Pew said.
That report found that borrowers “must have a pristine credit history to be approved for a loan.”
According to Pew, the average credit score of new mortgage borrowers reached 742 in 2024, the highest on record, and 29 points higher than the average credit score of consumers nationwide.
Meanwhile, the report said, “the best available research indicates that the mortgage market contains less risk today than it did in the mid-1990s, when Fannie Mae and Freddie Mac first adopted modern underwriting practices.”
But tighter lending standards have also made mortgages safer. Pew found that mortgage delinquency rates are near 25-year lows and default rates are at their lowest levels on record.
The researchers acknowledged that expanding lending to borrowers with lower credit scores would probably lead to more delinquencies and foreclosures. They argued instead for targeted changes aimed at borrowers who can afford a mortgage but are excluded by current underwriting practices.
Rodnyansky said greater access to mortgages could reduce the number of buyers who rely on alternatives such as land contracts.
Some borrowers struggle to qualify for mortgages because they have low incomes, limited credit history, variable earnings or income from self-employment.
But Pew found that the type of property can also present obstacles. Mortgages are harder to obtain for homes costing less than $150,000, manufactured homes (such as mobile or modular homes), properties in rural communities and homes needing significant repairs.
“Families can be qualified for homeownership,” Rodnyansky said, “but if they don’t qualify for financing, they’re not going to own the home.”
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