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Study: Down payment assistance doesn't mean a higher chance of defaulting

By Mike Wheatley | November 8, 2019

Common wisdom has it that home buyers who rely on down payment assistance are more likely to default on their mortgage repayments, but a new study has debunked that theory.

The study, by the Center for Household Financial Stability at the Federal Reserve Bank of St. Louis, found that buyers who receive financial assistance with their down payments are in fact, no more likely to default than anyone else. Earlier studies had suggested otherwise, leading to stricter lending requirements from the HUD for government entities that offer this kind of assistance.

Center for Household Financial Stability researchers came to their conclusion after examining the performance track record of hundreds of loans made with down payment assistance. They tracked loans that originated both in the lead up to, and following the Great Recession in 2008. The study controlled for aspects including the race and ethnicity of the borrowers, and found that blacks and Hispanics have a higher likelihood of defaulting regardless of what kind of financial assistance they did or didn’t have.

With home prices rising across the country, a growing number of buyers are forced to use down payment assistance in order to be able to buy a home. Currently, there are more than 2,000 down payment assistance programs available to buyers, including both government-sponsored and private options. According to MarketWatch, 40% of Federal Housing Administration-backed loans were made with down payment assistance in 2018, compared to just 30% in 2011.

“Households with [down payment assistance] were as able to benefit financially from rising markets as those without DPA,” the researchers wrote. “In setting guidelines around down payment assistance, policy makers should take care not to close off opportunities to aspiring minority home buyers.”

Mike Wheatley is the senior editor at Realty Biz News. Got a real estate related news article you wish to share, contact Mike at [email protected].
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