MONEY SAVVY : Subsidy Best Way to Add Home Buyers, Study Says

The most effective way to increase the number of renters who can afford a house is to subsidize the down payment, according to a Census Bureau study.

Reducing the amount of required down payment and lowering mortgage interest rates had less impact on the ability to buy a house, the report said.

The findings are contained in an analysis of homeownership in 1995 being released today.

The agency looked at the affordability of modestly priced houses, which it defined as homes that were less expensive than 75% of the houses in the area. These ranged from about $84,000 for homes bought by individuals to $136,000 for homes bought by families.

In analyzing the various reasons people are unable to afford a private home, researcher Howard A. Savage determined that a down payment subsidy of $2,500 would increase the number of renters who qualify to buy by 2 percentage points by reducing the amount of money needed up front.

A subsidy of $5,000 would boost those qualifying by 11 percentage points, $7,500 by 18 points and $10,000 by 22 points.

Even with the lower income requirement for lower rate mortgages, many still faced the barrier of a down payment and closing costs or still had too much debt to qualify.

Reducing interest by 3 points, the report said, would increase the share of renters who could qualify by only 1 percentage point.

Lowering the down payment from 5% to 2.5% increased the number who could qualify by 1 percentage point also. It lowered the initial payment needed, but increased the amount of income needed to qualify because the amount saved in down payment had to be added to the long-term cost of the home mortgage.