The program is aimed at buyers using loans backed by the Federal Housing Administration (FHA), which require 3.5% down, and it can cover all of it. On a $300,000 house, that’s $10,500. Buyers don’t pay interest on the money or make monthly payments on it. Unlike many other assistance programs, it also has no income limit and is open to repeat buyers.
The one caveat? If buyers sell, move out or refinance before five years, they will owe Zillow all of it. And the $1,080 a year Zillow says a typical buyer could save on housing costs assumes they’ve already saved 6.5% of the home’s price on their own.
How Zillow’s down payment loan works
To be eligible, your credit score has to be 640 or higher, and your FHA mortgage has to come from Zillow Home Loans. The program only works for a house you’ll live in, not a rental or vacation home. You’ll also go through Zillow’s regular approval process, and it has to show you can afford the entire monthly mortgage bill.
The money comes as a second mortgage on the home. It’s capped at 3.5% of either the sale price or the home’s appraised value, depending on which number is smaller. If you want a bigger down payment, you can put in as much as 6.5% from your own pocket, which brings the total to 10%. Your main mortgage carries a standard rate, and you’ll still pay FHA mortgage insurance on it.
The assistance won’t be applied to closing costs, which Zillow says usually run 2% to 5% of the total loan amount. Zillow Home Loans also isn’t the one lending you the down payment money. That loan comes from an outside creditor.
Buyers in Arizona, Delaware, Florida, Massachusetts, New York, Vermont and Virginia are shut out. In total, Zillow is offering the new program in 43 states and Washington, D.C.
Why the five-year rule matters
The loan terms are only wiped out once you’ve lived in the home and paid your mortgage on time for five straight years. Refinancing before then means repaying what Zillow gave you.
The average FHA rate was 6.78% mortgage in September. Ryan Stanek, a licensed mortgage loan originator with Minnesota-based mortgage broker Edge Home Finance, laid out why that’s a problem in a recent LinkedIn post.
“Plenty of buyers taking today’s rates are counting on a refinance if rates come down,” he wrote. “With this program, a refi in year two means paying back the down payment money as well.”
How Zillow came up with the $1,080 yearly savings figure
Zillow’s researchers based the figure on the value of a typical U.S. home, valued at $366,157 in September. They compared a buyer putting 6.5% down with one who puts down the same 6.5% and adds the 3.5% loan. Counting Zillow’s estimates for taxes, insurance and upkeep, the monthly payment came out to $2,920 for the second buyer and $3,010 for the first, representing the $1,080 difference over the course of 12 months.
