Paige Cerulli Last Updated On: October 4, 2023

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Could Zillow’s 1 Percent Down Payment Program Help or Hurt Homebuyers?

For homebuyers, saving up a down payment is often a time-consuming challenge that can cause them to put off buying their home. Zillow Home Loans has a solution: A program that allows buyers to put down just 1%.

With Zillow’s program, eligible buyers can pay 1% of the home’s total price as a down payment. Zillow Home Loans contributes an additional 2% of the cost through closing costs, bringing the total down payment to 3%, equivalent to the minimum down payment required by most conventional home mortgages. Buyers also have the option to put down 3%, and Zillow will contribute 2% for a total down payment of 5%.

The program is currently only available in Arizona, but Zillow has plans to expand it into other states.

Qualified applicants for the program must be first-time homebuyers. They must take a course on homeownership and plan to live in the home as their primary residence. Borrowers must have a minimum credit score of 620 and earn an income below 80% of the median income in the home’s location.

Helping Buyers Get Into Homes Faster

According to Zillow Home Loans, most homebuying markets face an affordability crisis, and saving for down payments is one of the biggest barriers homebuyers face. Since first-time buyers are often paying high rents, it can be even more challenging for them to save. According to Zillow Home Loans, the average rent nationwide is $2,062, 3.6% higher than one year ago. Pair that with rising home prices and interest rates, and 64% of first-time homebuyers put down less than 20%, with 25% of first-time buyers putting down 5% or less.

An analysis by Zillow Home Loans indicates that the program could help first-time homebuyers get into their homes sooner. According to the analysis, a buyer who wants to purchase a $275,000 home in Arizona, who makes 80% of the area’s median income and saves 5% of their income, could save a 1% down payment in just 11 months. That same buyer would need two and a half years to save a 3% down payment.

“For those who can afford higher rent payments but have been held back by the upfront costs associated with homeowners, down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,” says Orphe Divounguy, Zillow Home Loans’ Senior Macroeconomist. “The rapid rise in rents and home values means many renters who are already paying high monthly housing costs may not have saved up for a large down payment, and these types of programs are welcome innovations in lowering the potential barriers to homeownership for those who qualify.”

Downsides to the Zillow Home Loans Program

Buying a home a year or two sooner is an enticing offer, but is Zillow’s 1% down payment option a good idea for buyers? Maureen McDermut, Realtor, Sotheby’s International, Montecito, notes that while there are benefits to the program, homebuyers also need to be aware of the downsides. “Potential homebuyers have a better chance of purchasing a home because they only need to save 1% of the down payment,” she explains. “It is much easier to come up with 1% of the home price than it is 3%, 10%, or 20%. The major downside to this is that the lifetime cost of the mortgage increases dramatically. Instead of taking out a loan for 80% of the cost, you are borrowing 93% of the cost of the home, which will take much longer to pay off.”

McDermut explains that buyers who have a low down payment will also see higher interest rates. “With interest rates already high, it can make living in the home long-term financially difficult for some buyers,” she says.

Additionally, buying a home with just 3% down means that if the real estate prices drop even slightly, the homebuyer would be underwater on their mortgage, owing more on the home than what they would get if they chose to sell the house. Homebuyers who plan to stay in the house for only a few years could find themselves with an underwater mortgage, especially given the inflated home prices that are likely to drop as the economy recovers from the effects of the pandemic.

The Ideal Down Payment

While many conventional loans only require a 3% down payment, that’s not necessarily an ideal option for buyers. McDermut notes that a 20% down payment is often ideal. “However, with home prices on the rise, 10% has been more reasonable and common,” she says. “Of course, the most optimal solution is an all-cash offer, but that is not always a possibility.”

McDermut advises buyers to put at least 20% down if possible. “Additionally, homebuyers should have reserves saved for potential repairs or improvements on the home. I recommend at least $5,000 to $20,000, depending on the condition of the home being purchased. If it is a ‘fixer-upper,’ then usually a bit more would be needed. If it is a move-in ready home, then less is required for repairs,” explains McDermut.

Buyers considering the Zillow Home Loans program should consider all of the pros and cons that come with a smaller down payment. Taking advantage of the program might get buyers into a home faster, but they could pay more over the life of their mortgage unless they are able to start making larger mortgage payments to put more money toward their loan principle. With the potential for a mortgage to go underwater more easily with a small down payment, Zillow’s program is probably only best for homebuyers who are planning to stay in their home for at least five years. 

Paige Cerulli Paige Cerulli is a freelance content writer and journalist who specializes in personal finance topics. She graduated from Westfield State University and brings more than a decade of professional writing experience to the ConsumerCoverage team. Paige’s work has appeared in outlets including USA Today, Business Insider, and more.

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