Mortgage rates soared to their highest point in over two decades last month. Just days later, Zillow launched a product that fights back against those higher costs.
The company’s 1% Down Payment program, which went live Aug. 24, allows eligible borrowers to make just a 1% down payment when buying a house. According to a press release by Zillow, the program “lowers the down payment barrier and increases access to the housing market.” It can also “reduce the time homebuyers need to save” for their home purchase.
It all sounds nice, but can the program really make a difference in housing affordability? And what could it mean for investors who qualify for it?
How It Works
Zillow hasn’t released much detail about how to actually use the 1% Down Payment program, but according to the press release, eligible buyers will need to put 1% of their home’s price down, and then Zillow Home Loans will throw in another 2%. That 2% is paid at closing—not directly to the buyer.
Other than that, the company hasn’t said much else—including what requirements borrowers will need to meet in order to be eligible. There will likely be some sort of income requirement, especially considering Rocket Mortgage’s and UWM’s comparable programs both have them. (With UWM’s, buyers have to make 50% of the area’s median income or less.)
For now, Zillow’s program is only available in Arizona, though the company plans to expand beyond that down the line.
Will It Make a Difference?
While it’s true that having Zillow kick in part of your down payment can help you buy a home sooner and with less time spent saving, that’s not always a good thing.
For one, it could encourage cash-strapped consumers to take unnecessary risks—buying a home before they have the financial health to really support it.
Related: How Much Is a Down Payment on a House?
If the median home price in this country is $410,000, on a $400,000 mortgage, principal and interest alone will be about $2,700 per month, according to BiggerPockets CEO Scott Trench. He adds: “The difference between a 1% and a 3% down payment on a median home is $8,000. If an aspiring homeowner is qualified for a principal-and-interest payment alone of $32,000 per year—not to mention insurance, taxes, maintenance, utilities, and the other costs of homeownership—and can’t come up with $8,000, something is wrong. I’d personally encourage that borrower not to purchase until they have a bigger cash cushion.”
Some even argue that if the program catches on, there could be a glut of homeowners who’ve overextended themselves and are just one unexpected medical bill or home repair away from defaulting. That could lead to foreclosures and falling home values, a la 2008.
That’s getting ahead of ourselves, though. With a rollout currently in just one state, widespread adoption of Zillow’s program isn’t in the cards for a while.
The Bright Side
For buyers who are prepared financially—with a flush savings account and the ability to afford their mortgage payments for the long haul—the program could be a boon, helping them get into a home slightly more affordably.
It could also be good for investors looking to keep extra cash free for renovations and repairs.
As Trench puts it: “Keeping another $8,000 in the bank might be smart for many investors. That’s the difference between being able to fund a water heater replacement or get started on a roof replacement if something goes wrong in the early part of homeownership.”
Still, at the end of the day, Trench says, “The product is interesting and will get adoption…but it won’t fundamentally change the game for many buyers.”
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.