Urban Institute models risk for FHA zero-down loans

A review of academic literature and loan-level data finds that 0% down loans do not create dramatically higher default risk when underwriting targets credit quality. Default probability increases only slightly when moving from 96%–99% LTV to 100%–104% LTV, with the change described as statistically insignificant. The analysis uses Federal Housing Finance Agency public data covering about 47,000 loans originated between 2013 and 2021, measuring performance by whether loans entered 90-day delinquency within three years. Because 0% down loans start with less borrower equity, foreclosure loss severity could be higher. To offset this, a 25–35 basis point increase in FHA upfront mortgage insurance premium is proposed, calibrated to keep the Mutual Mortgage Insurance Fund whole while preserving affordability. The program is recommended to be limited to first-time homebuyers, with credit score thresholds and restrictions to one-unit properties. Relaxing down payment requirements could increase renter-to-homeownership transitions substantially.

"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."

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

"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."

"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."

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