Lennox's Real Estate Blog

sharing my passion for real estate

The Homebuyer Myth of “Skin in the Game”

with 6 comments

Last week, I posted a link to a proposal about a national first time homebuyer down payment assistance program. I’ve received many responses – including those who originally questioned it, but have since taken a further look and acknowledged its merits. And there are others who are still undecided. Ultimately, my goal is to stimulate conversation about ways that housing can support the U.S. economy while giving people the opportunity to realize the dream of homeownership.

Homeownership is historically an instrumental part of the U.S. economic engine, so it’s critical that we take measures to ensure that the housing market has a strong foundation for sustainability. What I would like to address today is some of the feedback that I’ve received from those who question the national down payment assistance program and suggest that it will put us right back where we were with the mortgage crisis.

There is a misconception that first time buyers who have “skin in the game”, meaning cash for a down payment, are less likely to default on a home loan than those without. The truth of the matter is that for decades the USDA has offered programs with 100% financing and the default rate on those loans is only 1.7%. The VA has a similar zero-down program and their default rate is 2.5%. FHA loans require a 3.5% down payment and their default rate is under 4%. According to the National Association of REALTORS, conventional loans, which require a 20% down payment, have between a 2% and 5% default rate depending on the specific loan type. The foreclosure rates tied to the subprime meltdown are nearly 15%.

Some first time homebuyers have saved the money needed for a down payment; others are fortunate enough to have family that is willing to gift them the funds. In both cases, most buyers are left with little savings following their home purchase; thus the emphasis on ensuring that buyers are well qualified. First time buyers that need down payment assistance are no different with the exception that over a 15 year period they will repay the DPA along with their mortgage. As such, those using down payment assistance typically purchase slightly less home than their counterparts in order to compensate for the DPA effect on financial ratios. The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

The moral of the story is that we need to focus on the qualifications of first time homebuyers, not the source of their down payment.

One of the main arguments that I have heard in opposition to a national down payment assistance program is that it will lead to higher foreclosures because it does not require “skin in the game,” as mentioned earlier. I think that the USDA program alone proves that even with 100% financing, responsible, qualified homebuyers who use down payment assistance are no more likely to default on their mortgage than those who use conventional loan products. In fact, according to national statistics, in some cases they are less likely to do so.

It’s important for people to enter into homeownership with a clear understanding of the financial responsibilities that accompany this kind of purchase. Unlike the time of subprime mortgages, buyers need to be responsible, have stable employment, good credit, and a healthy debt-to-income ratio. Foreclosure rates go down even more if first time homebuyers have taken a course that educates them about the responsibilities of home ownership.

As I’ve said before, my proposal for a national down payment assistance program is not about getting people into homeownership at any cost. It’s about providing opportunities and educating people about the possibilities that exist for those who are qualified and considering buying a home for the first time.

As always, thanks for reading,

Lennox

Written by Lennox

July 8, 2010 at 2:21 pm

6 Responses

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  1. The Myth of ?Skin in the Game? « Lennox's Real Estate Blog…

    I found your entry interesting do I’ve added a Trackback to it on my weblog :)…

    Mortgage 101

    July 9, 2010 at 4:50 am

  2. Hello Lennox,
    Thank you for getting this message out in such a clear and convincing way. I’m a fellow true-believer. In fact, I developed Down Payment Resource to help REALTORS, lenders and other housing professionals connect people and properties to DPAs and other buyer assistance already available. I would like explore how we may join forces to spread the word farther and faster. We launched this week with NorthstarMLS in MSP. Let’s talk!
    Best regards,
    Rob

    Rob Chrane

    July 11, 2010 at 7:43 am

    • Hi Rob – thank you for your feedback. Glad to have others in the industry on the same side of this. I will be in touch.

      Lennox

      Lennox

      July 12, 2010 at 3:08 pm

  3. I appreciate everything you are doing to keep the focus on real estate as the means to stimulate the economy. I also want to add that new construction is
    the big mover that creates jobs from lumber sales,
    plumbing fixture manufacturing, cabinet manfg., the list goes on and most of those products are U.S. manufactured items. I hope we see a push to increase
    new construction sales.Look forward to more positive movement.

    Carole

    Carole Wright

    July 14, 2010 at 2:51 pm

    • Hi Carole – thanks so much for taking the time to send your thoughts. We’re all in this together!

      Lennox

      Lennox

      July 16, 2010 at 10:05 am


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