Saving for a down payment to buy a home is one of the biggest challenges for buyers, especially with home prices near record highs.
To address that challenge, Zillow has introduced its 1% Down Payment program, allowing eligible buyers to finance up to 99% of their home purchase. The program is initially open to buyers in Arizona, with plans to expand to additional markets.
Zillow said it will enforce rigorous qualification standards on borrowers who use the program. Still, some in the real estate and mortgage industries are highly skeptical.
“Making it easier for everybody to get a mortgage with only 1% down is like putting candy in front of a baby,” Shmuel Shayowitz, president and chief lending officer at Approved Funding, told ConsumerAffairs.
Shayowitz is concerned that a 1% down payment requirement may encourage people who can’t really afford to buy a home to purchase one. It would allow the buyer of a $300,000 home to only put down $3,000, leaving a mortgage balance of $297,000.
“The people who should be given mortgages with 1% down should be more highly qualified individuals with the income and the reserves to make their mortgage payments,” he said.
A higher monthly payment
Steve Nicastro, a content team lead at Clever Real Estate, sees several dangers with putting so little money down. For one, financing 99% of the purchase will produce a higher mortgage payment each month, at a time when affordability is quickly eroding.
According to Nicastro’s calculations, putting 1% down on a $400,000 home and paying 7% interest would produce a principal and interest payment of $2,635 per month. The payment would be even higher once taxes and insurance are added to the payment.
“More importantly, putting such a low amount of money down means you'll likely need to pay more in private mortgage insurance (PMI), which adds to your monthly housing cost,” Nicastro said. “PMI can cost up to 2% of your loan amount every year. At a 1% rate, this would add $330 per month to your payment.”
Doesn’t address affordability
Nicastro says this kind of financing might make it easier to get into home ownership but does not address the industry’s biggest challenge – the affordability crisis that keeps many Americans unable to purchase a home.
Zillow says its program is not for every buyer. It’s for people who are able to afford very expensive rent but lack the savings to make a large down payment to purchase a home.
"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," said Orphe Divounguy, Zillow’s Home Loan' senior macroeconomist.