Housing Market Fears Raised Over 1% Mortgages Being Offered: 'Concerning'

Real estate website Zillow's plan to offer mortgages with only a 1 percent downpayment to help struggling homebuyers get on the property ladder has been met with skepticism on social media, where people wondered how much the program could really help buyers.

In its announcement of the program on Thursday, Zillow acknowledged that "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."

House prices skyrocketed in the two years following the beginning of the pandemic, as limited inventory, low mortgage rates, and high demand contributed to sparking bidding wars that brought up prices. The median existing-home sales price reached an all-time historic peak of $413,800 in June 2022, according to the National Association of Realtors (NAR)—after which prices slowly started to come down, mostly because of higher mortgage rates and the increased unaffordability of homes across the country.

But despite what real estate experts called a "correction" of the housing market, home prices remain higher than they were before the pandemic. According to NAR, the monthly median price of an existing home in June this year was $410,200—the second-highest price ever recorded since the association started tracking the data in January 1999.

Last month, the price dropped to $406,700—still 1.9 percent higher compared to a year before. Rent prices have also been skyrocketing in the past few years, making it harder for potential homebuyers to save for a home.

Eligible borrowers under Zillow's program will be able to put just 1 percent down on a home, while Zillow Home Loans will pay the other 2 percent—significantly reducing the time it takes for aspiring homebuyers to save for a home.

According to Zillow, reducing the downpayment burden to 1 percent of the purchase price would allow someone who makes 80 percent of their area's median income and saves 5 percent of their income to buy a $275,000 home in Phoenix, Arizona, in 11 months instead of the 2 and half years needed to save 3 percent.

"The Zillow Home Loans 1% Down Payment program offers eligible first-time borrowers in Arizona the option to put a 1% to 3% down payment on a home, with Zillow Home Loans providing a grant for the remaining 2, for a total of 3% to 5% down," Rian Furey, SVP and President of Zillow Home Loans, told Newsweek in a written statement.

"This program is available to buyers who meet minimum credit requirements and who can afford to make a mortgage monthly payment, but simply don't have enough saved up to come up with the necessary down payment. This program is one example of Zillow's efforts to help make home a reality for more people," he said.

Some on social media have expressed doubt over whether Zillow's plan can really help homebuyers at a time when mortgage rates are so high.

"Zillow is offering a 1% down payment through its Home Loans program What's the catch? This sounds to [sic] good to be true?" Forbes reporter Jack Kelly wrote on X, formerly Twitter.

Kelly added: "By setting specific eligibility requirements, Zillow is able to manage risk and ensure that borrowers are able to make their mortgage payments. The 1% down payment program is only available to eligible borrowers who meet certain criteria, such as credit score, income, and debt-to-income ratio Do you think this will end well??"

Others used the announcement of the program to point out how unaffordable the housing market has become.

"Today, Zillow announced that they will begin offering mortgages with 1% down. Meanwhile, other lenders are now offering 40-year mortgages. The monthly payment on a $500,000 home with 30-year mortgage and 1% down is $3,500, or $42,000 per YEAR. This is concerning," the account Point Blank Trading posted on X.

But some have defended the plan. Nikki Dunn, a finance adviser, pointed out that the plan is only available to a limited category of housebuyers, and that other companies have offered a 1 percent downpayment before—like Rocket Mortgage.

"These programs are great for lower income individuals. They need help," she wrote. "They may also waive mortgage insurance which can help even further. These buyers get to: -Lock in a fixed mortgage payment to protect themselves against inflation -Get appreciation over time."

"The real estate industry is super competitive and, therefore, many business models will be tried out," Lawrence Yun, Chief Economist at the National Association of Realtors told Newsweek. "Whether this Zillow plan is good and sustainable from a business profitability perspective is unclear. But consumers could benefit.

"Nevertheless, consumers should look at the fine print to ensure extra costs are not being paid in other areas and use Zillow's plan to leverage a better deal with their local lenders. The competitive marketplace benefits innovation and consumers in the long run."

Update, 8/28/23 06:15 a.m. ET: This article has been updated to include comment from Zillow and the NAR.