One potential safeguard is the existence of a down payment requirement that must be met by prospective homebuyers as a condition of securing a mortgage. The rationale is that when individuals invest their own money in the form of a down payment, the potential homebuyers will be more motivated to maintain their mortgage obligations. For those potential homeowners who need help in complying with the down payment requirement, there is down payment assistance. Down payment assistance plays a crucial role for some low- and moderate-income (LMI) individuals in achieving their goal of homeownership. A concern has arisen, however, that the availability of down payment assistance might diminish the influence of using personal funds as a motivating factor to follow through on mortgage responsibilities. Allison Freeman and Jeffrey Harden examine the factors that underscore the need by LMI homeowners for down payment assistance and the impact of down payment assistance on mortgage performance.1 The following is a summary of their study.


The financial crisis that began in 2008 had a profound impact on mortgage policies and practices. A repercussion of the crisis has been the stiffening of the qualifications necessary to obtain a mortgage. “One hotly debated issue concerns the establishment of down payment requirements that would give borrowers sufficient ‘skin in the game’ to deter them from defaulting on their home loans.”2 Although increasing down payment requirements might strengthen the resolve of homeowners to make good on their mortgage payments, it will shrink the pool of those who might be eligible for mortgages if borrowers are unable to obtain the additional funds to cover the down payment costs. LMI individuals are particularly at a disadvantage in accumulating the full amount for a down payment. One research effort indicated that down payment assistance programs that “provide even modest amounts of assistance can have a significant impact on the number of low-income and minority households that buy homes.”3

But what are the influences that underlie the access to outside assistance for the down payment? Of particular concern is the experience of black and white aspiring homeowners. Freeman and Harden reviewed the literature and found that “the primary factors in the gap between White and Black transitions to homeownership were differences in income, differences in family structure, and differences in the ability and willingness of parents to provide down payment assistance.”

The authors noted that “even less has been written on the relation between the use of down payment assistance and mortgage performance.” One study on the topic has been viewed with some skepticism. The study involved loans insured by the Federal Housing Administration (FHA). More specifically, the study compared the loan performance of FHA-insured loans with down payment assistance provided by seller-funded nonprofits with loans without such assistance.4 The finding was that the loans with down payment assistance performed more poorly than the loans without assistance. Freeman and Harden pointed out that the results should be regarded with some apprehension. They explained that the FHA had a standard 6 percent contribution limit on funds given directly to a buyer, but no limit on money given indirectly to a buyer through a nonprofit set up for that purpose. Consequently, seller-funded nonprofits were used to circumvent the FHA 6 percent contribution limit. In 2008, the FHA banned the use of funds from these types of programs. The authors sought to provide further insight on the relation between the actual use of down payment assistance and mortgage performance.

Data and Methodology

Freeman and Harden used data from the Community Advantage Panel Survey (CAPS), a longitudinal survey of LMI homeowners and renters in the United States. According to Freeman and Harden, the survey examines the Community Advantage Program (CAP), a secondary mortgage market program that began in 1998 as a collaborative effort between Self-Help, Fannie Mae, and the Ford Foundation. CAP is composed of affordable housing mortgage loans from banks that were purchased by Self-Help and sold to Fannie Mae using a grant of $50 million from the Ford Foundation. More than 46,000 loans made to LMI households between 1998 and 2009 were added to the CAP portfolio. CAP borrowers received a 30-year, fixed-rate loan based on their ability to pay. Because of their financial profiles, it is unlikely that these borrowers would have obtained comparable loans in the private mortgage market.5 The authors used a subset of the CAP homeowners, namely those whose loans were originated between 1999 and 2003 (before the onset of the housing crisis).

Overall, the CAP loans performed rather well during the housing crisis. The CAP portfolio had a lower default rate than all other mortgages except prime, fixed-rate loans. Moreover, the CAP loans performed better than the subprime loans issued to comparable borrowers.

The authors used the CAP data to investigate two questions: First, what factors affect the use of down payment assistance in their sample of lower-income homeowners? Second, how does the use of down payment assistance affect mortgage performance? They explored these questions by using regression analysis.

Freeman and Harden used statistical estimation models to examine the factors that influence the use of down payment assistance. They considered five sources of assistance: (1) assistance of any kind, (2) assistance from a family member, (3) a second mortgage, (4) a community grant, or (5) assistance from a seller or real estate agent. Thus, the five separate estimating equations had one of these sources of assistance as the dependent variable. The independent (or explanatory) variables included the following: demographic variables (such as owners’ race, age, and education); financial literacy variables (such as whether owners’ parents had a checking account); and credit-related variables (such as owners’ credit scores and debt-to-income ratios).


The statistical analysis of the homeowners in the sample who used extra assistance revealed some noteworthy findings:

  • Among Hispanic, black, and white owners, Hispanic owners were least likely to receive down payment and closing costs assistance from the seller or a real estate agent.
  • Blacks were least likely to obtain down payment and closing costs assistance from family members or friends.
  • Blacks were most likely to report use of a grant for down payment and closing costs assistance.

The authors also analyzed the influence of down payment assistance on mortgage performance. A negative impact on mortgage performance might be due to homeowners having too little “skin in the game,” thus weakening their incentive to honor their mortgage obligations.

A positive effect that might result from the use of assistance is the freeing up of homeowners’ savings. Homeowners would be able to access their savings as needed to stay current on the mortgage. Using CAPS data from 2003 to 2011, Freeman and Harden relied on regression analysis to investigate this issue. They estimated two regressions with two different dependent variables: (1) if the homeowner’s mortgage had ever been 30 to 90 days delinquent and (2) if the mortgage had ever been more than 90 days delinquent or in foreclosure. The independent variables in both equations were the same as those used in the previous equations. The sample included homeowners who used assistance and those who did not.

Freeman and Harden concluded: “The most important finding from our research is the lack of a statistical and substantive difference in mortgage performance between those who do and those who do not use any form of down payment assistance.”

The authors recommended that “changes that increase down payment requirements must be coupled with support for programs that assist qualified owners in securing affordable loans.” They also cautioned against “imposing highly restrictive down payment requirements that would disproportionately restrict access to mortgage credit for groups of otherwise creditworthy borrowers.” Moreover, in the event that down payment requirements are increased, the authors suggest that “legislators and policymakers should also increase their support for community programs to help all qualified borrowers make their down payments.”

The views expressed here do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.

[1]Allison Freeman and Jeffrey J. Harden, “Affordable Homeownership: The Incidence and Effect of Down Payment Assistance,” Housing Policy Debate, 25(2) (2015), pp. 308–319.

[2]Austin Kelly, “Skin in the Game: Zero Down Payment Mortgage Default,” Journal of Housing Research, 17(2) (2008), pp. 75–99; available at

[3]Christopher E. Herbert and Winnie Tsen, “The Potential of Downpayment Assistance for Increasing Homeownership Among Minority and Low-Income Households,” Cityscape, 9(2) (2007), pp. 153–184; available at

[4]U.S. Government Accountability Office, Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance, Report No. GAO-06-24, 2005; available at

[5]The creditworthiness of those in the data are as follows: 90 percent of the CAP homeowners had either a loan-to-value ratio greater than 90 percent, a debt-to-income ratio greater than 38 percent, or a credit score of 640 or less.