Real estate technology platform Zillow recently announced the launch of its 1% Down Payment loan program that allows customers to obtain a conventional mortgage loan with as little as 1% of the purchase price upfront. So, on a $300,000 home purchase, the borrowers would only need to come up with $3,000 toward the down payment.
How Zillow’s 1% down payment loan program works
These conventional mortgages technically have a 3% down payment, which is currently available to first-time buyers. However, at closing, Zillow will contribute 2% of the purchase price toward the down payment, leaving just 1% for the borrower to pay. Borrowers can typically pay for other closing costs with gift funds, or they can typically be rolled into the loan itself, so it’s entirely possible that 1% of the purchase price is all it would take to buy a home with this program.
The program is aimed at people who can afford the monthly mortgage payments on a home, but who are struggling to come up with the initial cost of the down payment. There are other programs with little or no down payment options, such as VA loans and USDA loans, but Zillow’s program doesn’t have the same restrictions.
For the time being, the program is only being offered in Arizona. Zillow plans to roll it out to other markets later.
To qualify for the program, borrowers must be first-time home buyers, as that is who qualifies for 3%-down conventional mortgages in the first place. They also must complete a home buyer education course and agree to occupy the home as their primary residence. Borrowers need a minimum FICO® Score of 620 and need an income below 80% of the area’s median income.
Pros and cons of a 1% down mortgage
The big advantage here is that first-time home buyers can get into a home without having to come up with a large down payment. Many people who would love to buy a home have simply been hit hard by inflation and have been allocating most of their income to paying rent and other living expenses, making it difficult to save enough for even a 3% down payment.
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There are some drawbacks to a low-down payment mortgage, as well. For one thing, conventional mortgages with less than 20% down typically require private mortgage insurance, or PMI. Costs can vary, but typically range from 0.5% to 1.5% of the loan amount per year. Plus, the smaller your down payment, the more you have to finance through your mortgage lender, and therefore the larger your monthly payments will be.
There’s also quite a bit that isn’t clear just yet. We know Zillow is paying 2% of the purchase price as part of the down payment, but does the loan have a higher origination fee or interest rate than it otherwise would to offset this? After all, Zillow Home Loans is a business and needs to make money somehow.
Is it the best way for you to get into a home?
As mentioned, Zillow’s 1% Down Payment program is only offered in Arizona for the time being, but the company is targeting a wider rollout. A low-down payment mortgage like this can be a great way to get into a home with little upfront cost, but it’s important to weigh the pros and cons and understand what you’re getting into with fees and interest.