Alternative mortgages providing a back door to homeownership

Consumers with bad credit ratings are increasingly taking advantage of alternative mortgage products that allow them to buy a home without a huge down payment, often through lease-to-own contracts. But borrowers still need a steady income to qualify for these products, the Wall Street Journal reported.

One example is a company called Divvy Homes, which is offering to buy homes on its clients’ behalf. The company then rents the homes back to its clients, with these payments slowly building up enough equity for them to buy the home at some point in future. In hot markets, Divvy Homes will even make an all-cash offer on behalf of its clients, allowing them to buy the home they want even if they don’t have the funds to do so.

But some industry analysts warn that such mortgage products could lead rise to a scenario similar to the one that caused the 2008 housing crisis, which saw thousands of homeowners across the U.S. default on their mortgages. Still, the alternative mortgage companies argue that new technology will prevent this from repeating. According to the Journal, such companies use special software algorithms to calculate the best price at which to purchase a home on behalf of their clients. The algorithm also predicts what the property will be worth in future, and factor in the creditworthiness of prospective buyers.

Divvy Homes currently only operates in the Atlanta, Cleveland and Memphis markets. The way it works is, the company buys a home with cash on behalf of its client. The buyer pays a 1% or 2% down payment, and undergoes a credit check to ensure they qualify for the program. Once approved, they can sign a three-year lease and move into the home. Divvy charges them a monthly rent, but the payment is more than it would be for a similar rental home. The extra amount goes towards equity to help the renter eventually buy the home. Once the three year lease is up, the buyer should own around 10% of the home. At that point they can qualify for a regular mortgage. Divvy Homes generally targets homes priced between $100,000 and $400,000.

“We looked nationwide and saw homeownership rates declining year over year,” Nicholas Clark, Divvy’s co-founder and chief technology officer, told the Journal. “This works for married couples with a family looking to buy their first home who don’t have enough saved up to qualify for a mortgage or who have a credit hiccup to repair.”