The New York State Department of Financial Services is warning that alternative home purchase finance agreements might be a cover for predatory mortgage lending practices by unlicensed entities.
Consumers who had problems obtaining mortgage financing have been turning to alternatives like rent-to-own, lease-to-own or land purchase contracts to eventually become a homeowner.
"Alternative home purchase agreements often are being marketed to financially distressed consumers, promising a path to homeownership, but putting consumers at risk without the protections of a mortgage," said NYDFS Superintendent Maria Vullo in a press release.
"As the state regulator of financial institutions in New York, DFS takes very seriously its obligation to protect consumers from predatory lenders. This alert is being issued to create awareness among consumers and to let them know that lease-to-own, rent-to-own and land installment contracts must be carefully considered under New York laws and regulations."
These alternatives may violate state laws and regulations regarding fair lending, mortgage protections, interest rates, habitability, property condition and/or real property disclosures, NYDFS said.
When done right, these alternatives help consumers become property owners, but there are instances where the contract is written in such a way where "the end result couldn't be homeownership," said Mark Favaloro, the owner of Aamtrust Mortgage, a mortgage brokerage in Clifton Park, N.Y. He has worked with consumers who purchased a home using these contracts.
Typically the consumer needs to obtain mortgage financing by a certain time frame in order to complete the contract. However, one common problem he has seen in these contracts involves seller concessions or renter credits that violate conforming and/or government mortgage loan program guidelines and that keeps the consumer from obtaining a mortgage.
NYDFS would not comment on whether it has taken any enforcement actions or what companies are currently under investigation.
There are consumers who didn't realize they qualified for a mortgage that have entered into these contracts, Favaloro said. Usually it was after they had been turned down by a bank and the failed to explore other options, said Favaloro, who is also president of the New York Association of Mortgage Brokers.
If a consumer enters into one of these contracts, they need to have it reviewed by an experienced real estate attorney. Even if they already signed a contract, have it reviewed and work with a mortgage originator in order fix the deficiencies so the consumer can obtain financing, he said.
He would not like to see the state declaring these contracts to be illegal.
"These are three options [for consumers to obtain homeownership] and I would hate to see people not have them available," Favaloro said.