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Christopher Galvan

Professor Nancy H Carranza

ENG 123

23 October 2022

Building Better Pathways to Homeownership

Whether driving down the highway, browsing the web, or channel surfing and stumbling

across a Saturday afternoon marathon of Fixer Upper on cable television, the thought of owning

a place to call home one day will cross your mind. A two-story house with a wraparound porch

in the middle of a suburb or a two-bedroom condominium in the middle of a metropolitan area

with your favorite coffee shop on the corner, the two distinctive styles of homes share a similar

path. That would be the path of homeownership, which all starts with a down payment. A down

payment is the difference between a home’s purchase price and the mortgage loan amount. To

increase and assist the population in taking part in and achieving the “American Dream” of

homeownership, I will argue that there should be more pathways of accessibility to

homeownership through updates to current lending guidelines, limited to no down payment

options available to all homebuyers, more awareness of Homebuyer Education Programs, and

community gifting pathways.

Shortly after my wife and I became engaged, we were sat down and given two options;

either be gifted the down payment for our first home or have our wedding ceremony and

reception paid for in full. Being young and not knowing at the time how difficult it would be to

not only qualify for a home loan but get an offer for a home purchase accepted, we chose the

latter. As the years went by, and living and renting in Orange County, CA, it became clear to us
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that we could afford a mortgage. Years of rent increases and casually but subtly asking others

what they were paying for their mortgage made us land on that realization that it was an expense

that we could afford in our budget. With that information and newfound desire, thus came the

pursuit of the “American Dream.” Merriam-Webster defines this as a happy way of living that is

thought of by many Americans as something that can be achieved by anyone in the U.S.

especially by working hard and becoming successful. Their example goes on to say, “With

good jobs, a nice house, two children, and plenty of money, they believed they were living the

American dream.” (The American Dream). However, the issue was the down payment needed

to purchase a home while also living in one of the most expensive counties in the nation to keep

a roof over your head, whether it be renting or paying a mortgage on a high property value

homestead. As property value increased, the amount needed for a down payment became more.

When appealing to the idea of qualifying for a home loan, other factors to consider are Debt to

Income Ratio, FICO Score, Credit History and Loan to Value Ratio (Rose) but that is an

argument for affordability not accessibility.

As mentioned before, we lived in one of the nation’s most expensive locations to rent. As

of July 2022, Santa Ana, California which is the heart and county seat of Orange County, is

ranked number ten with an average of $2,070 a month rent for a one-bedroom apartment (Paris).

The previous statistic would mean that one would be putting close to $25,000 a year towards

keeping a roof over their heads apart from paying a few extra hundreds of dollars to keep their

lights on and keeping the household functioning. With a quarter of a hundred thousand dollars

towards basic living expenses a year it was proving quite difficult to produce a down payment to

obtain a mortgage. In 2022 home prices have rapidly continued to increase as more homebuyers

entered the market. However, due to the small supply and growing number of buyers, the
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national median home price went up more than 200% of wage growth. This contributed to the

U.S housing market “roaring ahead for the 11th straight year” (Rising Prices). A combination of

rising interest rates and increased prices have led to not only larger down payments in parallel to

the higher purchase price, but to borrow less to keep the mortgage payment affordable. These

factors result in more permanent renters and less homeowners.

There are a few mortgage loan options that vary in different minimum down payment

amounts or high loan to value ratios. Throughout my career in the mortgage industry, I came

across a few options for a home loan: A conventional home loan, where a minimum of twenty

percent (20%) down payment is required; a Federal Housing Administration (FHA) Loan, where

a minimum of three and a half percent ( 3.5 %) down payment is required; and a Department of

Veteran Affairs home loan, where there was no minimum down payment required depending on

your length of military service. Of course, the last two options were appealing, but given that I

did not serve my country by enlisting in the military, we were left to entertain a government-

backed Department of Housing and Urban Development (HUD) FHA Loan. As you can imagine,

one must meet a list of criteria to qualify for government backed loans such as FHA and VA

loans.

Although a 3.5% down payment of a purchase price is appealing to a prospective buyer,

due to the strict guidelines implemented by HUD, it is not an attractive offer a potential seller

wants to accept because it is a risky loan product to begin with. The loan application may be

denied while the home contract is in escrow after further Underwriting review. Firsthand, we

turned in about ten offers to purchase a home but were turned down for a more favorable offer

with a Conventional Loan where a minimum of 20% of a purchase price is required vs a 3.5%

minimum down payment. Since 1934, FHA has served nearly 44 million homeowners and
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financed more than 50,000 multifamily mortgages representing 4.8 million modestly priced

rental housing units. FHA also finances residential care facilities, hospitals, manufactured

housing, home improvements, and reverse mortgages. Although the latter programs are a

relatively small share of the market, they provide funds for certain segments that might otherwise

have difficulty getting loans (Szymanoski). Common obstacles of an FHA loan are Maximum

mortgage loan amounts set by HUD for each individual county, minimum FICO credit score of

580 and property conditions. If you are looking to purchase a fixer upper, an FHA loan would

not be an option as something simple as chipped paint can prevent a loan from being completed

until resolved. Even if these requirements are not unreasonable, if a seller is made aware that a

buyer is using limited down payment option, they are more likely to choose an offer with a

conventional loan or an all-cash offer. I propose that loan types should not need to be disclosed

to a seller of the property. The risk of the loan lies solely with the buyer and the

mortgagee/lender not the seller. HUD should review any minor guidelines such as repainting of

chipped paint to be removed as well to avoid said contracts from falling out. It many also need to

consider removing itself from government oversight to loosen its restrictions. In the article, “In

defence of an independent Federal Housing Administration (FHA)”, Stacey Schindelar states, "If

the FHA is to do its job, it will have to free from HUD’s influence and be allowed to operate as

an independent agency." In short, the less government oversight, the less pressure to appeal to

political agendas and more focus on its original commission to assist the population into homes.

The Department of Veteran Affairs offers their own product that allows no minimum

down payment at all to purchase a home, but the caveat is you must have served in the military to

take advantage of the loan offer. The US Department of Veteran Affairs (VA) home loan

guaranty is one of the benefits for veterans that were established under Servicemen’s
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Readjustment Act of 1944, commonly known as the GI Bill. The VA home loan program is

among the first federal programs designed to increase rates of homeownership and assist

veterans and their families and their reintegration to civilian life (Spitzer). What FHA and VA

loans do is assume the risk of a limited to no down payment on a mortgage. If the borrower

defaults and ends up in foreclosure, the respective departments will act as insurance and repay

some of the loss the Lender assumed by providing the loan. The risk lies more with an FHA loan

vs a VA Loan. The credit quality of VA borrowers has generally been riskier than that of other

types of borrowers, but rates of foreclosure have been only slightly higher than conventional

loans and lower than FHA loans (Spitzer). If borrowers are more inclined to keep their homes

from being foreclosed on, I suggest we revisit having the 0% down payment option across the

board and not have it exclusively available to GI Bill recipients. If you think about it, nowadays,

we can purchase vehicles with no money down, large online purchase with no money down and

get into hundreds of thousands of dollars of educational loans with no money down. If that is the

case, we can explore having this as a viable option as well for a home purchase with no

restrictions.

There are programs to obtain a home with down payment assistance. In a study that

specifically examines down payment assistance and its neighborhood impact, Di et al provide

evidence that recipients were less likely to default than similar unassisted households in Dallas,

Texas (Di). The authors do not explicitly compare the loan burdens of recipients to non-

recipients but suggest that the results imply that the program provided benefits without

increasing exposure to the financial risk of home ownership (Lang). In fact, in my hometown of

Santa Ana, California, there is a newly expanded program called “My First Home” where the

city would provide a 0% interest rate loan up to $120,000 in assistance to buy primary residence
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as long as it remains your primary residence for the life of the loan. There is no repayment

needed until 45 years after the loan is given. However, there are further stipulations to the

program. “The buyer must have at least three percent (3%) of the purchase price for a down

payment from seasoned funds.” Seasoned funds mean money that has been sitting in the buyer’s

bank account for a minimum of 90 days. For example, if Uncle Joe gave his newlywed nephew

and niece a present of $5,000 in June, the couple would not be able to use it as their own funds

until September unless Uncle Joe was willing to document the present as a gift to purchase a

home. To verify the validity of the funds being “seasoned,” three most-recent bank statements

would be required to review. Gifts may be contributed towards the purchase of a home but more

on that later. Also, the buyer must be pre-qualified for a First Mortgage and have a positive

credit history and obtain a fixed-rate first mortgage. Co-signers and variable rate loans are not

allowed (My First Home). Although a step in the right direction, it is pretty much the same as

obtaining a mortgage on your own but paying part of the loan later. Additionally, there are some

programs out there that are like this, but the assistance portion of the down payment is not

payable until the home is no longer yours. An example of this program is the CalHFA Loan

product. Per their product description, “the money you put ‘down’ or the down payment on your

home loan can be one of the largest hurdles for many first-time homebuyers.” Like CalHFA,

other government sponsored agencies offer several options for down payment and closing cost

assistance. This type of borrowed down payment is referred to as a “second or subordinate loan.”

They are further referred to as "silent seconds", meaning payments on this loan type are deferred

so you do not have to make a payment on the borrowed down payment until the associated home

is sold, refinanced, or paid in full (Agency). This type of program helps to keep your monthly
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mortgage payment affordable once you are in the home but does not lower the risk of default

because there is still repayment to be done.

Currently, real estate crowdfunding exists but it would require repayment and is still very

new. Some lenders are accepting it as well, but it is still being debated as an acceptable source of

funds at this time. Per Corey Baker, “When the Securities and Exchange Commission (SEC)

proposed its rules to allow crowdfunding under the Jumpstart Our Business Startups (JOBS) Act,

it raised the issue of whether crowdfunding would be a viable option for building and owning

large-scale projects.” Baker goes on to say that “Crowdfunding projects have been increasingly

geared towards real estate development and are changing the scope of investment by enabling

developers to solicit securities-based funding from the public.” Like GoFundMe or Kickstarter

campaigns, this type of product offers real estate developers a new avenue to build up the capital

needed to finance projects. Along with all new concepts, although crowdfunding has “created a

temporary boom to the economy,” Baker states it is one of the “most controversial segments of

online purchasing and investing” and that the impacts of this creative option remain an argument

of debate on financial reform. (Baker)

HBE awareness needs to increase and only adds to the homebuying experience. It has

proven to add a small percentage of benefit for the homebuyer and provide a reduction of risk for

the lender. Many affordable homeownership programs often require participants to complete

HBE as a preventative measure to avoid default and foreclosure risk. Despite the widespread use

of HBE in these programs, few studies have been conducted to date examining whether

prepurchase HBE influences borrowers’ default risk. Research on prepurchase HBE has largely

focused on the competing risks of the borrower ever defaulting versus prepaying on the

mortgage. Hirad and Zorn analyzed a sample of almost 40,000 Freddie Mac Affordable Gold
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loans, finding that homeownership counseling was associated with a 19 percent decrease in the

likelihood of a borrower ever becoming 90 or more days delinquent (Hirad & Brown). If this

program is accessible to all first-time homebuyers, not only will it increase the rate of

accessibility, but it would allow the homebuyer to weigh out whether they are prepared for such

a financial toll. This could be an added course in High School General Education or simply a

standard requirement for all types of mortgages versus exclusively to down payment assistance

programs. Most HBEs focus on budgeting aspects, defining mortgage lending terminology and

the process if you should default on your home. In fact, national standards for HBE mandate that

the curriculum include money management, credit, and lending issues, including avoiding

predatory lending and loss mitigation tools (Osteen).

Imagine obtaining the down payment of the home without a silent second that needs to be

repaid. My proposal is to create a program where a qualified and “educated” home buyer can

pull from a pool of funds and have it considered a “Gift.” Current lending guidelines allow for a

gift to be used towards down payment assistance but in most cases, the donor must be a relative

or employer. Per Fannie Mae guidelines, a gift can be provided by a relative, defined as the

borrower’s spouse, child, or other dependent, or by any other individual who is related to the

borrower by blood, marriage, adoption, or legal guardianship; or a non-relative that shares a

familial relationship with the borrower defined as a domestic partner (or relative of the domestic

partner), individual engaged to marry the borrower, former relative, or godparent. The donor

may not be, or have any affiliation with, the builder, the developer, the real estate agent, or any

other interested party to the transaction (Personal Gift). Every year, while filing taxes, to get the

most out of deductions, U.S. Taxpayers and business owners contribute or make considerable

sized donations to organizations for tax write offs. What if they were allowed to contribute to a
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fund specifically for potential homebuyers to fill the gap of the minimum down payment for their

home with no repayment needed for the buyer later avoiding the need of a silent second or the

need to stay in the home for a length of time? The Bible tells us, “Don’t look out only for your

own interests, but take an interest in others, too.” (Philippians 2:4). As human beings we may not

be able to make a significant difference individually, but we can make waves as a group. The

homebuyer would have to go through Homebuyer Education (HBE) that other loan programs

require as well but that is typically 8 hours of education for a swap of a foot in the door to their

own home. Pun intended. For the purpose of this argument, we can call this a “Community Gift.”

Since current lending guidelines allow for gifts already, there could be an argument to loosen the

restrictions of who can gift towards the purchase of a home as well. A great opportunity to make

such amendments to existing guidelines would be after presidential candidates propose campaign

promises. In the article, “Down Payment Programs Get Renewed Focus,” Spencer Lee states,

“The extent to which homeownership is recognized as a means toward closing the wealth gap

was underscored in the 2020 presidential election, when President Biden made down payment

assistance a key campaign pledge. The current $3.5 trillion social infrastructure plan Democrats

hope to usher through includes a provision that would distribute as much as $25,000 in down

payment assistance to first-time home buyers.” If we continue to improve on these programs

over time, we can see a significant rise in first time homebuyers.

There is an argument that if one cannot afford to save for a down payment, then one

should not go after buying their own home until they are able to produce the required amount. Or

if you cannot afford to buy in a certain location, one should consider buying elsewhere. As

reasonable as those sound, there are other factors that come into play that would support that the

above would not apply to all. What if there is one source of income in the household?
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Additionally, if that reason is because the amount paid out in childcare is not worth having the

other spouse go to work every day for. Perhaps, one parent my homeschool the children? What

about single parent households? Or a caring for an elderly parent? There is also the scenario

where the employer may be located in a high cost of living area. These scenarios make it difficult

to get ahead but should not bar potential buyers from taking part in homeownership. To be clear,

I am not advocating for a leniency on credit profiles or credit history or debt to income ratios as

we do not want a repeat of the housing market crash from the early 2000s to take place. The

beginning of the 2000s witnessed a surge in nonprime lending with an attendant proliferation of

new products, including many that allowed borrowers who could not meet traditional

underwriting standards to obtain home mortgages and achieve homeownership (Homeownership

Built). That type of lending had no accountability and was prior to the involvement of the

government in how loans should be written. Since then, a new entity, the Consumer Financial

Protection Bureau, was formed to help borrowers become aware of exactly what they are signing

up for. The Consumer Financial Protection Bureau (“CFPB”) was born when an idea met its

moment. The idea was a consumer protection agency for financial products, and the moment was

the turmoil of the subprime mortgage crisis and the Great Recession. Those circumstances led, in

2010, to the first new financial regulator since the Office of Thrift Supervision was created in

response to the savings and loan crisis three decades earlier (Mogilnicki). This was done by

updating the loan application and various disclosures that are required to go out to the borrower

to avoid any misconception of rates and terms of the loan. The CFPB may even be able to lend a

hand in the governmental partnership in implementing the proposed Community Gifting

Pathway mentioned earlier.

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Overall, the guidelines in place today are reasonable but in today’s world of

crowdfunding, higher cost of living and increased housing prices, they should be updated to

allow for easier accessibility to a mortgage. Zero Percent (0%) down payment options should not

be exclusive to GI Bill recipients as they have proven to perform better than the alternative of the

minimum three and half percent (3.5%) down payment. If they are updated, it should be done so

with the requirement of Home Buyer Education to further reduce the risk of default and

foreclosure. Lastly, if a new Community Gift Program is implemented, it would create a sense of

servanthood and charitable giving to help others get more in life with a bit of sacrifice of our

own. If these proposals do not come to pass, at the very least, we can make a small change by

helping a relative or close one who is looking to obtain their first home by giving them a head

start on their journey to homeownership by being the ones that gift them a portion of their down

payment. Whether it be a small or large contribution, it will show that we are not in this alone.

Over time, the dream can be a reality.

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Works Cited

Agency, California Housing Finance. “Homebuyers Loan Program: CA Housing Finance

Agency.” Homebuyers Loan Program | CA Housing Finance Agency,

https://www.calhfa.ca.gov/homebuyer/programs/index.htm.

Baker, Cory. “Real Estate Crowdfunding - Modern Trend or Restructured Investment Model:

Have the SEC’s Proposed Rules on Crowdfunding Created a Closed-Market System.”

Journal of Business, Entrepreneurship and the Law, vol. 9, no. 1, Jan. 2015, pp. 21–58.

EBSCOhost, https://search-ebscohost-com.libproxy.calbaptist.edu/login.aspx?

direct=true&db=edshol&AN=edshol.hein.journals.jbelw9.4&site=eds-live&scope=site.

Brown, Scott R. “The Influence of Homebuyer Education on Default and Foreclosure Risk: A

Natural Experiment.” Journal of Policy Analysis and Management, vol. 35, no. 1, Dec.

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Program: A Spatial Hedonic Model.” Journal of Policy Analysis and Management, vol.

29, no. 4, Sept. 2010, pp. 682–97. EBSCOhost, https://search-ebscohost-

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HIRAD, ABDIGHANI, and PETER ZORN. “Prepurchase Homeownership Counseling: A Little

Knowledge Is a Good Thing.” Low-Income Homeownership: Examining the Unexamined

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docID=1699319.

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Choice.” Journal of Real Estate Finance & Economics, vol. 49, no. 3, Oct. 2014, pp.

329–51. EBSCOhost, https://doi-org.libproxy.calbaptist.edu/10.1007/s11146-013-9432-1.

Lee, Spencer. “Down Payment Programs Get Renewed Focus: Congress Included Funding for

Such Assistance in Its Infrastructure Bill.” National Mortgage News, vol. 46, no. 1, Sept.

2021, p. N.PAG. EBSCOhost,

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Mogilnicki, Eric J., and Lucy C. Bartholomew. “A Decade at the Consumer Financial Protection

Bureau.” Business Lawyer, vol. 77, no. 2, Mar. 2022, pp. 481–506. EBSCOhost,
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Paris, Martine. “The 10 Most Expensive US Cities for Renters.” Bloomberg.com, Bloomberg, 26

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“Philippians 2:4 Don't Look out Only for Your Own Interests, but Take an Interest in Others,

Too.: New Living Translation (NLT): Download the Bible App Now.” Philippians 2:4

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U.S.” The Mecklenburg Times (Charlotte, NC), 20 July 2022. EBSCOhost,

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Shindelar, Stacey. “In Defence of an Independent Federal Housing Administration

(FHA).” Housing Finance International, Winter 2021, pp. 45–48. EBSCOhost,

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Spitzer, Kerry, and Lauren Lambie-Hanson. “Institutions and Geographic Concentration in VA

Mortgage Lending.” Cityscape, vol. 22, no. 1, 2020, pp. 75–102. JSTOR,

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Szymanoski, Edward. “The Federal Housing Administration: 80 Years Young and Going Strong:

HUD USER.” The Federal Housing Administration: 80 Years Young and Going Strong |

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