Buyers who don’t pony up a down payment are more likely to default on their loans, and FHA loans require qualified buyers to put down as little as 3.5% of the purchase price.

In response to the changes, the Chenoa Fund sued HUD last month. The Native American financial group, one of the largest programs targeted, provides down-payment assistance on more than 70,000 FHA loans across the country each year. Borrowers, who do not have to be Native American, typically have lower credit scores and live in poorer states. They do have to repay the down payment loan, often at interest rates that are about half a percentage point higher than market rate.

As a result of the suit, HUD delayed its planned changes until July 23.

“The elimination of national programs is going to eliminate another source of down payment for borrowers,” says Michael Whipple, vice president of the Chenoa Fund. The national assistance program is affiliated with Utah’s Cedar Band of Paiutes and CBC Mortgage Agency.

Government zero-down loans won’t be affected

Down-payment assistance is key for many would-be home buyers who can handle a monthly mortgage payment, but have difficulty scraping up a lump sum for the down payment. Escalating home prices make that even more challenging. In April, home list prices reached a record median $310,000 nationally, according to® data. That’s led about 30% of buyers today to tap into some sort of down-payment assistance program, according to the Urban Institute policy research group.

Most home buyers seeking mortgages don’t put the traditionally standard 20% down on a property. In fact, the median down payment was just 13%, according to a 2018 National Association of Realtors report. Many more opt for lower down-payment programs, such as 3.5% with an FHA loan.

Those who can’t come up with even that much often turn to government and housing group programs and to relatives for help. The money may come as a lump sum, added debt, or a loan that gradually gets forgiven.

The U.S. Departments of Veterans Affairs and Agriculture also offer zero-down-payment loans for qualified buyers.

The pros and cons of down-payment assistance

Eliminating the Chenoa Fund is likely to hit areas that are the most dependent on the upfront mortgage sweeteners, says Whipple. States where more than 40% of buyers tap down-payment assistance include: Alaska, Mississippi, West Virginia, Wyoming, and Virginia, according to the Urban Institute.

Already, renters have opted out of leases as their home-closing date nears—only to learn their much-needed assistance is in jeopardy, he says.

However, former FHA head Ed Golding, now an adviser to the Urban Institute, says HUD is correct to rein in national down-payment groups. He and the feds aren’t as concerned with community-based housing programs that provide assistance to much smaller numbers  of local buyers.

After all, the housing crisis a decade ago was set off when buyers who weren’t able to afford their loans began defaulting on them.

“You don’t want the allow the riskier part of the market to hurt what is important,” says Golding.