Zillow’s small down payment mortgage will come with a big monthly bill

Renters struggling to save for a home could benefit from a 1% down payment mortgage from Zillow Home Loans, the latest effort to jump-start one of the slowest housing markets in a generation.

Zillow Home Loans, affiliated with home-search site Zillow, announced the 1% down payment mortgage on Aug. 24, with the loans being rolled out first in Arizona and then nationwide in the coming months, according to the Seattle-based company.

Zillow Home Loans’ goal is simple: Connect with renters with good-paying jobs who can save a few thousand dollars a lot easier – and faster – than the tens of thousands of dollars needed for many mortgages with larger down payment requirements. 

For example, a 1% down payment would only require $8,000 for an $800,000 home, about the current median-priced home in California, according to the California Association of Realtors. In comparison, a loan with a 5% down payment would need $40,000.

A 1% DOWN PAYMENT WILL ‘MAKE THE DREAM OF OWNING A HOME A REALITY’

For the average renter, saving the additional $30,000-plus could take years.

“For those who can afford higher rent payments but have been held back by the upfront costs associated with homeownership, down payment assistance can help to lower the barrier to entry and make the dream of owning a home a reality,” says Orphe Divounguy, senior macroeconomist for Zillow Home Loans. “The rapid rise in rents and home values means many renters who are already paying high monthly housing costs may not have enough 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.”   

Perhaps, but a 1% down payment should come with a few warning signs. 

A tiny down payment means a larger monthly mortgage payment – and a small amount of equity in the home. Now, Zillow Home Loans will contribute an additional 2% at closing for homebuyers through its program, which could help with the risk of an underwater mortgage.

However, consumers will still need a chunk of change every month for the mortgage payment.

Mortgage payment for a 30-year loan based on the down payment of an $800,000 home

Down payment as % of purchase priceDown paymentMonthly mortgage payment
1%$8,000$6,373
3%$24,000$6,259
5%$40,000$6,146
10%$80,000$5,864
20%$160,000$5,031

Important note: The monthly mortgage payment includes homeowners’ insurance and property taxes. However, the figure does not include other possible costs, such as HOA fees and/or Mello-Roos taxes.

Source: NerdWallet Mortgage Calculator

DEBT-TO-INCOME RATIO WILL BE A CHALLENGE FOR MANY BORROWERS 

With a 1% down payment mortgage, the monthly payment is about $6,400 for an $800,000 home, including property taxes and homeowners’ insurance, according to the NerdWallet mortgage calculator. A 3% down payment for the same home would have a $6,260 monthly payment.

And a 10% down payment would come with a $5,870 monthly payment – or a savings of about $500 per month.

Mortgages with little or no down payment – and often no interest for a few years – were popular during the housing boom that became the housing bust and eventually led to the Great Recession. After the financial meltdown, banking regulators enacted much-stricter lending requirements.

In order to qualify for a mortgage today, borrowers must meet tougher debt-to-income ratios, and that could be an issue for some wanna-be buyers under 1% down payment loans.

Consumers should crunch the figures to determine if a 1% down payment fits their budget or if saving more for a down payment makes more sense. ADOBE STOCK

The debt-to-income ratio includes auto loans, college debt, credit cards and other money owed. Do the math, and the average household buying the median-priced home (or just about any home) in California will need to earn a lot.

The California Association of Realtors recently reported that households needed to earn at least $208,000 for an $800,000-range home in California during the second quarter, based on a 20% down payment. The figure was also for slightly lower mortgage rates than those of today.

And while a 20% down payment seems like a lot, the average California homebuyer in six of eight regions plunked down at least that much for homes purchased during the first half of the year, according to Redfin (see list, below).

(The post continues after the table)

Down payments by region compared to a year ago
MetroDown payment% change from a year ago% of purchase price
Anaheim$215,000-2.3%20%
Los Angeles$141,044-8.4%20%
Oakland $147,600-17.3%20%
Riverside$38,744-38.4%9.7%
Sacramento$58,254-32.5%12.4%
San Diego$124,000-6.1%20%
San Francisco$325,000-7.5%25%
San Jose$300,000-3.2%20%

Source: Redfin

FEELS LIKE 1995 AGAIN

Zillow Home Loans’ announcement is grabbing headlines, but other mortgage providers — including industry giant Rocket Mortgage — have offered 1% down payment mortgages.

But Zillow’s super-low down payment loan comes during a challenging time for the housing market. With the highest mortgage rates in more than two decades and most homeowners “locked in” with near-record-low rates from just a couple of years ago, few homes are available on the market.

And with rates climbing past 7% in recent weeks and creeping closer to 8%, mortgage applications have dropped to the lowest level since 1995, according to the Mortgage Bankers Association.

“Homebuyers withdrew from the market due to the elevated rate environment and the erosion of purchasing power,” says Joel Kan, MBA vice president and deputy chief economist.

FEWER THAN 1 OF EVERY 5 CALIFORNIA HOUSEHOLDS CAN BUY EVEN WITH A 20% DOWN PAYMENT

The critical supply of available homes has been challenging for home shoppers and has created stiff competition for homes and increased prices during the past several months.

So, even a 1% down payment that piques curiosity may be squashed with the reality of hefty mortgage payments, the need for large paychecks to qualify and the challenge of finding a home for sale (see list of how many homes sold per 1,000 homes by region). 

Fewer than one of every five households could buy a median-priced home during the second quarter in California, the lowest figure since 2006, according to CAR. The affordability rate is based on a 20% down payment, a big investment but one that comes with a smaller mortgage payment – and no mortgage insurance, another cost for many homeowners.  

Redfin: How many homes changed hands per 1,000 homes in the first half of 2023
  • Anaheim: 8.6
  • Los Angeles: 7.9
  • Riverside: 10.3
  • Sacramento: 8.0
  • San Diego: 7.8
  • San Jose: 6.1

“The real estate industry is super competitive and … many business models will be tried out,” National Association of Realtors chief economist Lawrence Yun told Newsweek about the 1% down payment loan from Zillow Home Loans. “Whether this Zillow plan is good and sustainable from a business profitability perspective is unclear. But consumers could benefit. The competitive marketplace benefits innovation and consumers in the long run.”