Zillow introduces down payment help for FHA borrowers

FHA loans, which are insured by the Federal Housing Administration, have long helped many buyers become homeowners. These mortgages often offer competitive rates, and borrowers can qualify with as little as 3.5% down.

Even so, with home prices still elevated, coming up with a 3.5% down payment can be a challenge. Zillow Home Loans, the company’s lending arm, is trying to ease that burden.

“Buyers tell us the down payment is what’s holding them back, and we hear the same thing from agents about their clients,” said Eric Wilson, Zillow’s senior vice president and general manager of mortgages.

Zillow Home Loans has rolled out a down payment assistance program for FHA loans, designed to help eligible borrowers bridge that gap.

“This program helps us serve more qualified buyers by giving them a simple way to clear that hurdle, with their mortgage and down payment assistance handled in one place,” Wilson said.

For borrowers who qualify for an FHA loan through Zillow, the company may cover the full 3.5% minimum down payment.

How Zillow’s aid could move buyers closer to 10% down

While the program can cover the minimum required down payment, Zillow also says it could help borrowers get to a 10% down payment. The company notes that a larger down payment can lead to meaningful long-term savings.

According to Zillow research, a median-income U.S. household would need 4.2 years to save for a 10% down payment on a typical home.

If Zillow covers 3.5%, the buyer would only need to save the remaining 6.5%, cutting the estimated saving time to 2.7 years. That represents a reduction of 1.5 years. The assistance would also lower typical monthly housing costs by $1,080 per year.

The benefit could be even greater in more expensive markets. In those areas, the time needed to save for 10% down could fall from 9.1 years to 5.9 years, with annual savings of $2,880.

More upfront equity and a smaller monthly payment are appealing advantages for homebuyers using Zillow’s program. But FHA loans come with another detail that is often overlooked.

Why reaching 10% down can reduce FHA mortgage insurance costs

Many borrowers are familiar with private mortgage insurance, or PMI, which is commonly associated with conventional loans. It is a monthly cost for buyers who put down less than 20%.

Once borrowers reach 20% equity, they can request cancellation of PMI, and lenders must remove it at 22% equity.

FHA loans work differently. Unlike conventional loan PMI, FHA mortgage insurance usually cannot be canceled simply because a borrower has built enough equity.

There is one key exception: if the down payment is at least 10%, FHA mortgage insurance can generally stop after 11 years, according to the U.S. Department of Housing and Urban Development.

Borrowers pay 1.75% of the loan amount in FHA mortgage insurance at closing, and then continue making monthly payments. The monthly amount varies, but HUD says it generally ranges from 0.15% to 0.75% of the principal balance.

Saving enough for 10% down does more than increase equity or reduce the amount borrowed. It can also allow buyers to eliminate FHA mortgage insurance after 11 years, potentially saving thousands over the life of the loan.

How Zillow’s down payment assistance program works

Down payment assistance can be especially useful for FHA loans, particularly when it helps buyers reach that 10% threshold. Here is how Zillow Home Loans’ program is structured:

• Amount: Zillow lends up to 3.5% of the purchase price or appraised value, whichever is lower.
• Structure: The assistance comes as a second loan with no interest and no monthly payment.
• Forgiveness: Zillow forgives the second loan after five years if the buyer lives in the home and stays current on payments.
• Repayment: If the borrower sells, moves out, or refinances before five years are up, the second loan must be repaid in full.

In practice, the assistance works like an interest-free second loan with no monthly obligation. If borrowers meet the occupancy and payment rules for five years, the loan is forgiven and does not have to be repaid.

Who can qualify for Zillow’s assistance?

The program may help many FHA borrowers, but there are important requirements.

It is available in 43 states and Washington, D.C. It is not offered in Arizona, Delaware, Florida, Massachusetts, New York, Vermont, or Virginia.

Applicants must have a credit score of at least 640. That is notable because the Federal Housing Administration’s minimum credit score for FHA loans is 580 in most cases.

Borrowers must still qualify for an FHA loan, which means Zillow Home Loans has to determine through manual underwriting that the monthly housing payments are affordable.

“For buyers who can afford the monthly payment, we can now cover the full minimum down payment,” Wilson said.