The Chinese home buyers are liquidity constrained with limited access to refinance, dissatisfactory social insurance and high home prices. The government requires all borrowers to make a substantial down payment, normally 20% to 50% of the home price, depending on non-risk-related qualifications. Data reveals an adverse selection problem: those who paid down just the minimum are more likely to default. A theoretical model is constructed to explain this finding: those who choose to pay down just the minimum are less wealthy, and more liquidity constrained during the loan term, thus more vulnerable to negative shocks. The model is estimated using individual mortgage data provided by a major commercial bank of southeast China. We then provide forecasts on long-run default probabilities, as well as quantitative evidence for future adverse selection.