Urban Institute study makes the case for a 100% LTV FHA mortgage

A new study from the Urban Institute concludes that the Federal Housing Administration (FHA) could offer zero-down payment mortgages to first-time homebuyers without significantly increasing default risk or endangering its insurance fund.

“Allowing zero-down payment mortgages would level the playing field for potential homeowners without family wealth,” the researchers wrote in the report. “Moreover, FHA zero-down payment loans would also replace the inconsistent patchwork of down payment assistance programs.”

Authored by Alexei Alexandrov, Laurie Goodman, Ted Tozer and Sam Valverde, the report reviews academic literature and loan-level data, finding that 0% down loans do not generate dramatically higher default risk when underwriting focuses on credit quality.

According to the analysis, moving from a loan-to-value (LTV) ratio range of 96% to 99% to a range of 100% to 104% LTVs raises the default probability by just 12 basis points — a difference the authors describe as statistically insignificant.

The findings draw on Federal Housing Finance Agency (FHFA) public data that covers roughly 47,000 loans originated between 2013 and 2021. Performance was measured by whether a loan entered 90-day delinquency status within three years of origination.

Managing the risk

Because 0% down loans start with less borrower equity, loss severity in the event of foreclosure could be slightly higher. To offset this, the paper proposes a 25- to 35-bps increase in the FHA’s upfront mortgage insurance premium for zero-down loans. On a $400,000 mortgage, that amounts to about $1,400.

This premium could be financed into the loan balance and is calibrated to keep the Mutual Mortgage Insurance (MMI) Fund whole while preserving affordability. The authors noted this structure may also encourage borrowers who can afford a down payment to contribute one.

To further mitigate risk, the researchers recommend limiting the zero-down FHA product to first-time homebuyers. The loans would require a credit score above 700 — or a 660 cutoff if the borrower can provide 24 months of on-time rent payments, for example. The program would also be restricted to one-unit properties to prevent renter-to-landlord transitions.

Unlocking homeownership

Using Consumer Financial Protection Bureau (CFPB) survey data from 2018, the report found that relaxing down payment requirements could nearly double the share of renters transitioning into homeownership to 14.2 million.

Eliminating the down payment constraint entirely would make an estimated 6.5 million additional renter households “ready to buy.” (The authors note that updated data would likely show the barrier composition has changed somewhat since 2018).

The report also shows an ongoing psychological barrier: Renters consistently overestimate the financial requirements needed to qualify for a mortgage. Many assume a 20% down payment and a 700-plus credit score are mandatory, even though the median FHA borrower puts down less than 5% and has a sub-700 credit score.

Addressing concerns that moving more renters into homeownership would inflate home prices, the researchers argued that the overall demand for housing units would be a net neutral.

When a renter becomes a homeowner, they vacate a rental unit, leaving the total number of occupied housing units unchanged. While there could be short-term shifts in demand between the rental and owner-occupied markets, the housing ecosystem would rebalance over time, the authors added.

Flávia Furlan Nunes reported and wrote this article with drafting assistance from HousingWire Automation, an editorial tool that helps transform announcements and industry data into HousingWire-style news coverage.