Housing finance agencies (HFAs) play a vital role in providing homeownership opportunities for low- and moderate-income households. HFAs, which are often quasi-governmental agencies, are tasked with expanding access to homeownership. HFAs often provide tools and resources to help overcome the barriers to homeownership that low- and moderate-income borrowers face, such as coming up with the initial down payment for the purchase. One method HFAs use to serve this community of borrowers is down payment assistance (DPA) programs, which have seen an increase in demand in recent years. HFAs should consider the advantages and challenges of these types of programs by employing analytical models to successfully fulfill mission goals.

Who are low- and moderate-income borrowers?

The definition of low- and moderate-income borrowers varies by source; however, most definitions are linked to area median income (AMI). For the purposes of this paper, we will define low-income borrowers as households that earn less than 50% of the AMI, where the locations are mapped to census tracts to determine the AMI. We will define moderate-income borrowers as households with an income between 50% and 80% of the AMI. Low- and moderate-income borrowers have less income than others in their communities and may be in a position where building long-term wealth is a challenge. Saving the necessary down payment for a home is one of the most significant barriers to homeownership for low- and moderate-income borrowers.

Breaking into the housing market has the potential to help low- and moderate-income families build long-term wealth. House sale price data from the Federal Reserve Bank of St. Louis shows that the average U.S. home has appreciated by 6.7% annually over the last five years.¹ This can provide families with property equity that sets them up for long-term financial gains.

What is down payment assistance?

One of the core missions of HFAs is to help make homeownership a reality for many households in a fiscally responsible manner. As the need to accumulate a substantial sum of money for a down payment keeps the dream of homeownership at bay for many potential borrowers, most HFAs now offer DPA programs, which help low- and moderate-income borrowers overcome this financial barrier. DPA programs provide homebuyers with the funds to pay for the up-front costs associated with buying a home. There are many different DPA programs; with every U.S. state and a few U.S. cities having their own HFA, there are too many different DPA programs to detail in this article. We will discuss the three most common DPA program structures.

Types of DPA programs

• Amortizing second mortgages: In this type of loan program, a second mortgage is provided to the borrower. The borrower is effectively using the funds provided by this second mortgage as a substitute for the down payment for the first mortgage. The second mortgage often has a 10–15-year term and a favorable interest rate that is below the market rate for the first mortgage. The second loan is fully amortizing, meaning monthly principal and interest payments are made on the loan, which pay down the balance over the life of the loan. Should the borrower sell or refinance the home prior to the second loan being fully paid, the balance of the second mortgage is due at the time of sale or refinance.
• Non-amortizing second mortgages: Another type of second mortgage used for DPA is referred to as a non-amortizing second. With this type of program, the borrower also uses the funds provided by the second mortgage to contribute toward the down payment on the home. However, unlike the amortizing second mortgage, a non-amortizing second mortgage does not have monthly payments. The second loan balance is deferred until the first loan is paid off or the property is sold or refinanced, at which point the loan is due in full. Non-amortizing seconds are sometimes forgiven after a certain number of years. The deferred structure of these loans makes them ideal for borrowers who plan to stay in their homes for long periods of time.
• Grants: Unlike second mortgages, grants are not a loan at all. Grant-based programs provide the homebuyers funds that can be used toward their down payment up front. These provided funds never need to be repaid.

Comparing the amortization of different assistance programs

Figure 1 displays the amortization of three loans with different types of DPA, in other words, the remaining exposure to the HFA from the loan(s) at any point after origination. Figure 1 displays an amortizing second, a non-amortizing second, and a grant assuming a 30-year first lien of $270,000 with a fixed 6.5% interest rate. The amortizing second includes a $30,000 second lien that amortizes over 15 years at a 1.5% fixed interest rate. The non-amortizing second includes a $30,000 second lien with a 0.0% interest rate that is due at the termination of the loan (we assume for simplicity that the property is not sold nor is the loan refinanced prior to loan expiration). The grant includes $30,000 fully forgiven at the inception of the first lien loan.

How does down payment assistance impact HFA risk exposure?

While DPA programs help increase homeownership for low- and moderate-income households, they also have risk implications for the HFAs that provide them. HFAs must manage and monitor the costs associated with these programs, particularly when borrowers can no longer afford to make their mortgage payments. Unexpected mortgage losses stemming from DPA loans could present problems for HFAs in terms of managing capital allocations across programs, achieving mission goals, and having the potential to disrupt housing markets; therefore, careful monitoring of these exposures is an important risk management practice for every HFA.

Costs of DPA programs

Both the amortizing second and the non-amortizing second DPA programs result in a higher combined loan-to-value (CLTV) ratio. A CLTV ratio is the ratio of all loans on a property to the property’s value at a point in time. These DPA loans often have a 100%, or greater, CLTV ratio. In our example, the $300,000 home without any DPA has a 90%² CLTV ratio. However, when we introduce the second mortgage as DPA, it becomes a 100%³ CLTV ratio loan. Higher CLTV ratios increase the risk that the borrower will stop making mortgage payments when difficulties arise because high CLTV ratio borrowers, by definition, have less equity in their homes. Low home equity increases the likelihood a borrower may walk away from their home in the event of a decline in home values, which could result in the borrower owing more on the property than the property is worth. In other words, all else being equal, a loan with a lower CLTV ratio is more likely to have its borrowers successfully remain in the property and make payments as agreed.

Using Milliman’s proprietary single-family mortgage performance model housed in our M-PIRe® platform, we examine the impacts on a hypothetical borrower’s success rate posed by the introduction of $30,000 of DPA on a $300,000 home in Wisconsin. A successful borrower is defined in our model as a borrower who avoids entering into a default event caused by not making mortgage payments for 180 days or longer.

Figure 2 shows that with a hypothetical $270,000 loan on a $300,000 Wisconsin home without DPA, 93 borrowers out of 100 will successfully remain in their homes in an expected economic environment. The introduction of $30,000 of DPA moves the success rate down slightly to 89 out of 100 borrowers using the economic assumptions under Moody’s baseline scenario as of Moody’s August 2025 release. Moody’s baseline scenario is the economic projection Moody’s defines as the most likely outcome given the current conditions and Moody’s view of where the economy is headed. Moody’s baseline scenario is their 50th percentile scenario, meaning Moody’s projects that half of the possible future economic scenarios will be worse than the baseline scenario, and half of the possible future economic scenarios will be better than the baseline scenario. Moody’s also produces several upside and downside economic scenarios, and we have selected the S0 and S4 scenarios to examine the impact on borrower success rates. Moody’s S0 scenario is one of their optimistic scenarios, and broadly speaking, there is a 4% probability that the economy will perform better than this scenario. Moody’s S4 scenario is their protracted slump scenario, and broadly speaking, there is a 96% probability that the economy will perform better than this scenario. As can been seen in Figure 2, Moody’s S0 scenario shows that in an optimistic economic environment the borrower success rate increases to 92 borrowers when considering DPA. If the economy were to experience a stress environment like Moody’s S4 scenario, this figure drops to 87 borrowers.

Conclusion

If the addition of DPA ultimately results in additional borrowers not being able to successfully make mortgage payments, why have the programs become so popular in recent years? The answer is simple: Without them, fewer low- and moderate-income households would be able to purchase homes in today’s market. DPAs have become a more utilized tool by HFAs due to increasing home prices and higher mortgage payments as interest rates have increased.

The demand for DPA programs will likely continue to rise, and HFAs will continue to be tasked with the difficult job of getting as many people successfully housed using the funds available to them. Understanding the advantages and challenges that DPAs pose is critical to HFAs’ balance sheets. We recommend HFAs use detailed, loan-level models that consider important loan characteristics, such as whether there is DPA when estimating reserves or projecting future capital requirements. Financially sound estimates can be a powerful tool in helping HFAs maximize the impact of their missions.

¹ Federal Reserve Bank of St. Louis. (July 24, 2025). Average Sales Price of Houses Sold for the United States (ASPUS) [Data set]. Retrieved September 15, 2025, from https://fred.stlouisfed.org/series/ASPUS.
(512,800 / 371,000)^⅕ - 1; Where $512,800 is the average sale price for U.S. houses sold in Q2 2025, and $371,100 is the average sale price for U.S. houses sold in Q2 2020.

² $270,000 / $300,000 = 90%

³ ($270,000 + $30,000) / $300,000 = 100%