For homebuyers struggling to come up with a down payment in today’s market, Zillow Home Loans is offering a lifeline—a 1% down payment.

Through its new program, a qualified buyer can pay 1% toward a down payment and Zillow will contribute an additional 2%—bringing the total down payment to 3%—which is the typical minimum payment required for a conventional home loan.

“Most markets are in the midst of an affordability crisis, and saving for a down payment remains one of the biggest barriers for many potential homebuyers,” Zillow said in its statement announcing the new program.

Homebuyers can put down a maximum of 3% and still receive Zillow’s 2%, bringing the total down payment to 5%. The 2% Zillow provides is paid through closing costs and not as a payment to the borrower.

Zillow will roll out its program in Arizona before expanding to other markets across the country—but the company didn’t say when or where it would expand next.

Although Zillow’s program appears generous at the surface, it’s unlikely to ease affordability challenges in markets where housing costs have skyrocketed. That’s basically all of America at this point.

The median U.S. house price is $410,000, and 3% down is going to mean hefty mortgage costs, especially at today’s rates.

Who could benefit from Zillow’s program?

Zillow aims to help Americans faced with soaring rent prices that now average $2,062—3.6% higher than this time last year.

The new program would make it possible for buyers to potentially save up for a down payment in under a year.

Zillow notes that a buyer who makes 80% of their area’s median income and saves 5% of their income would need to save for 11 months to afford the down payment on a $275,000 home in Phoenix with help from its new program.

Without Zillow's assistance, that same buyer would need 31 months to save 3% of the purchase price for that same Phoenix home.

To qualify for Zillow’s new program, homebuyers will likely need a credit score of around 620, make an annual salary of $20,000, and have a debt-to-income ratio somewhere between 36-50%. The lower the debt-to-ratio, the better.

“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,” said Orphe Divounguy, Zillow Home Loans’ senior macroeconomist.

A majority of first-time home buyers (64%) are putting down less than 20% of a home purchase in today’s market. According to the National Association of Realtors, first-time homebuyers typically put down 6% of the purchase price at closing, while repeat buyers usually put down 13%.

Echoes of 2008?

Zillow’s program could make it easier for people to become homeowners, but it doesn’t ease the challenges of affording a home once it’s purchased.

Home values have surged since the pandemic due to rising demand and supply shortages. National home prices are up over 24% between 2020-2023. That’s almost $90,000 in actual dollars, according to the St. Louis Fed.

Buying a home with an extremely small down payment increases the risk of financial hardship and even foreclosure. Especially at today’s mortgage rates.

A small down payment means higher monthly mortgage payments, a longer amortization period, and higher overall costs as lenders require insurance to cover a borrower’s “risky” loan.

The subprime mortgage crisis provides endless examples of how lowering down payments can lead to financial ruin.

In 2005, the median down payment for first-time buyers was 2%, not far off Zillow’s advertised rate. Lax down payments encouraged more people to “buy” a home in the 2000s. Eventually contributing to the worst financial crisis of a generation.

Nobody is saying today’s housing market mirrors the subprime mortgage era. But there are limits to making homeownership more accessible. Especially when ownership is prioritized over financial stability.