Zillow launches down payment aid that may trim mortgage expenses by $1,080 a year, with an important restriction

Zillow Group (NASDAQ: Z) is now offering would-be homebuyers cash to help cover a down payment. If borrowers remain in the home and keep making their mortgage payments for five years, they do not have to repay the assistance.

The Seattle real estate company introduced the offer through its lending unit, Zillow Home Loans. When announcing the program, Eric Wilson, senior vice president and head of Zillow’s mortgage business, said buyers often say the down payment is the biggest obstacle.

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The program is designed for buyers using Federal Housing Administration (FHA) loans, which require a 3.5% down payment, and it can cover that full amount. On a $300,000 home, that works out to $10,500. Borrowers do not pay interest on the assistance or make monthly payments on it. Unlike many aid programs, this one has no income cap and is available to repeat buyers.

The drawback is that if a buyer sells, moves out or refinances before the five-year mark, the full amount must be repaid to Zillow. The $1,080 a year in housing-cost savings that Zillow highlights also assumes the buyer has already saved 6.5% of the home’s price on their own.

How Zillow’s down payment loan works

To qualify, applicants need a credit score of at least 640 and must obtain their FHA mortgage through Zillow Home Loans. The home must be owner-occupied, not a rental or vacation property. Buyers must also pass Zillow’s normal approval process and show they can handle the full monthly mortgage payment.

The assistance is structured as a second mortgage. It is limited to 3.5% of the lower of the purchase price or appraised value. Buyers who want to contribute more can add as much as 6.5% from their own funds, bringing the total down payment to 10%. The primary mortgage follows standard pricing, and FHA mortgage insurance still applies.

The program does not cover closing costs, which Zillow says typically amount to 2% to 5% of the total loan. Zillow Home Loans also is not the source of the down payment money itself; the second mortgage comes from an outside lender.

Buyers in Arizona, Delaware, Florida, Massachusetts, New York, Vermont and Virginia are excluded. Overall, the program is available in 43 states and Washington, D.C.

Why the five-year rule matters

The loan is forgiven only after the homeowner has lived in the property and made on-time mortgage payments for five consecutive years. Refinancing before then means repaying the down payment funds.

The average FHA mortgage rate was 6.78% in September. Ryan Stanek, a licensed mortgage loan originator with Minnesota-based broker Edge Home Finance, explained in a recent LinkedIn post why that could be a concern.

“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 calculated the $1,080 annual savings

Zillow’s researchers based the estimate on the typical U.S. home price of $366,157 in September. They compared one buyer putting down 6.5% with another who made the same 6.5% down payment and added the 3.5% loan. Using Zillow’s estimates for taxes, insurance and upkeep, the monthly payment came to $2,920 for the second buyer and $3,010 for the first, which equals a $1,080 difference over 12 months.

That savings estimate assumes the buyer already has 6.5% saved. Zillow’s report also notes that 3.5% alone meets the FHA minimum, so a buyer could contribute nothing toward the down payment. But putting less money down generally means a larger monthly mortgage bill. Zillow still presents the option as reasonable for someone who can afford the payment but has not yet built up the cash for a down payment.

What to consider before taking Zillow’s down payment loan

If there is a real chance you will move or refinance within five years, you should plan on repaying the assistance.

It is also worth comparing other options. State or local housing agencies may offer grants or forgivable loans, and some nonprofits and employers also provide down payment help. A conventional mortgage can require only 3% down, and eligible veterans can qualify for a Department of Veterans Affairs loan with no down payment at all.

Dee Bares, a mortgage loan originator at Corona, California-based lender Paramount Residential Mortgage Group, wrote on LinkedIn that buyers should compare offers from other lenders and fully understand the terms before signing. Before committing, borrowers should make sure they could repay the full amount if they had to sell or refinance before year five.

“Before celebrating the assistance, compare the interest rate, APR, and total loan costs,” she said. “A higher interest rate could cost you hundreds more every month and thousands over the life of your mortgage. Make sure you understand what you’re agreeing to.”