In an attempt to assist those who are being priced out of the market due to higher rates, rising rents, or still elevated home prices, Zillow has announced a new 1% down payment program.
With this program, buyers can provide a 1% down payment, and Zillow Home Loans will pay 2% as a down payment, bringing the total to 3%, which is commonly the minimum required to qualify for a Conventional loan.
In addition, buyers who provide a 3% down payment will also receive 2% from Zillow, bringing their total up to 5%.
This program is currently only available in Arizona, but Zillow says they plan to make it available in other markets too.
The Goal Behind The 1% Down Loan
Purchasing a home is likely harder now than it ever has been in the past. Interest rates are at a 22 year high at 7.23%, and as a result, mortgage companies are suffering from the lowest number of new mortgage applications in 28 years.
According to Zillow, this new 1% down program will “reduce the time eligible homebuyers need to save and open homeownership to those who are otherwise ready to take on a mortgage.”
The ultimate goal of this program is to incentivize new buyers to purchase a home. In North Carolina, home sales are currently down 16% year over year. Their goal is to make home ownership more accessible by lowering the upfront cost buyers are faced with. With significantly cheaper upfront costs, Zillow is hoping that people will be more willing to save up for this expense since it will take significantly less time.
Perhaps the largest demographic that Zillow hopes will benefit from this program are those who are paying big money for rent. They mention that saving for a down payment is one of the biggest barriers people who are making high rent payments are faced with.
Zillow also noted that a someone living in Phoenix who makes 80% of their area’s median income, and saves 5% of that income, would only need to save for 11 months to afford the down payment on a $275,000 home. If they were planning to use a 3% down payment loan, which is still relatively low, they would need to save for 2.5 years.
Is This Really A Liable Option For New Buyers?
In short- yes, this could be a program that many first time buyers are eager to take advantage of. I’m often working with buyers who are using a 0% down payment loan such as a USDA or VA loan, and if this makes it’s way to our market, it could expand the pool of buyers who could qualify for a low-down loan, and also expand the pool of houses that will qualify for low-down loans.
In 2022, the National Association of Realtors stated that the average age of a first time home buyer was 36 years old. Zillow states that over 60% of these first time buyers are putting down less than 20% on their first home, and about a quarter of all first time buyers are putting down 5% or less. If first time buyers are looking for opportunities to save on the upfront cost of home ownership, hopefully this program will help lower the average age of people who are buying their first house.
To qualify for this low-down loan, borrowers will have couple of boxes to check off first. They must be first-time home buyers, complete an education course on homeownership, have a minimum qualifying FICO credit score of 620, earn income below 80% of the median income where the property is located, and intend to occupy the property as their primary single-family residence, according to Zillow.
While it does sound like quite a few hoops to jump through, many first time buyers are likely already meeting some of the criteria, and won’t mind completing the rest.
Could This Have Negative Effects On The Housing Market?
Some are saying this is a recipe for disaster, because if housing prices go down they could quickly be upside-down on their loan, and it could potentially cause a housing crisis similar to 2008.
While the market isn’t as strong as it was a few years ago, I don’t believe that a true housing crisis is on the horizon, and I certainly don’t think this new program will be the straw that breaks the camels back.
I think many of the people who are saying this about the program don’t realize that Zillow is also providing 2%, which brings the total amount of equity to 3%, which is very common as many people using the popular conventional loan only pay the 3% minimum required for that loan.
0% down loans have been common for a very long time now using loans such as the USDA or VA loan, and many buyers are still using them in this market. Low-down loans are nothing new, but this one could be a great way to expand who has access to them, and on what properties. For example, only those who have or are serving in the military have access to the 0% VA loan, and only properties located in eligible areas can qualify for a USDA loans.
As far as the concern about prices dropping and borrowers being upside-down on their loans, well it seems unlikely. Despite the market growing more difficult to enter, market experts don’t expect any serious collapse in prices in the near future. Supply and demand has largely contributed to what prices are today, and while higher prices and interest rates certainly don’t get people excited to buy, rental rates are also still rising. In NC, home prices are up 4.4% year-over-year, and rent prices are up 3.6%. Since both are increasing, we can see that there isn’t necessarily a rise in demand just for buyers, but rather for housing in general. We have a huge demographic approaching the age of moving out on their own, and the supply of houses AND apartments is struggling to keep up.
Leave a Reply