America is in the midst of a housing affordability crisis, and saving for a down payment is one of the biggest barriers potential home buyers face. That’s why Zillow Home Loans is supporting eligible first-time home buyers with its new 1% Down Payment program. Borrowers who qualify can now put just 1% down on a home, and Zillow Home Loans will pay the other 2%. The program aims to reduce the time some potential home buyers need to save and opens up the possibility of homeownership to those who are ready to take on a mortgage.
“Rents have increased nearly 31% since the beginning of the pandemic,” says Zillow Home Loans economist Orphe Divounguy. “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.
“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.”
An analysis by Zillow Home Loans finds that by reducing the down payment burden to 1% of the purchase price, a home buyer looking to purchase a $275,000 home in Phoenix, Arizona, who makes 80% of their area’s median income and saves 5% of their income, would need 11 months to save for the down payment. By comparison, the same buyer who needed to save 3% of the purchase price would require more than two and half years (31 months) to save that amount.
Home buyers looking to purchase in the next year should take steps to research and prepare for getting a mortgage as they start on their home-financing journey. Among those steps:
- Understand your credit profile: Credit scores are key to getting approved for a mortgage, but for many home buyers, understanding credit is complex.
- Improve your credit score: Once buyers familiarize themselves with what’s in their credit report, they can take steps to pay down existing debts, pay bills on time, and review their credit report and dispute possible errors.
- Avoid closing accounts: Don’t close an account to remove it from your report. Those accounts aren’t automatically removed and will continue to show up on your report.
- Hold off on financing large new purchases: Wait to make purchases that need to be financed, such as a car, until after you close on a home. This type of purchase will impact your debt-to-income ratio, which will negatively affect the amount of home loan you qualify for.
- Determine what affordability looks like: Once buyers have a good understanding of their credit report and their credit score is at least 620 (generally the lowest score accepted by mortgage lenders) it’s time to understand how much home they can afford. Use Zillow’s mortgage affordability calculator to customize payment details.
The Zillow Home Loans 1% Down Payment program is currently available to eligible borrowers in Arizona, with plans to expand. Through the 1% Down Payment program, Zillow Home Loans will pay 2% of the down payment for eligible borrowers. The 2% is paid through closing and not as a payment to the borrower. Interested applicants should call 1 (833) 372-1449 to speak with a representative to learn more about the program and determine if it’s the right fit for their circumstances.
Related: Find more resources for first-time home buyers.