In 2018 Zillow got bit by the iBuyer Bug. Home prices had been on a steady rise and buyer demand sky rocketed when interest rates hit rock bottom during the pandemic. They took a leap of faith and attempted to make the shift from a tech focused housing marketplace, to an actual housing provider.

Without much proper due diligence, Zillow began making tens of thousands of aggressive all-cash offers. They hoped to help out sellers in need of a quick close, while also positioning themselves for a healthy profit by leasing or selling the same properties on the back-end. Ultimately, the business model was largely unsuccessful. In the end, they shut down their home buying operation and were forced to fire-sale a bunch of these properties at a steep loss.

The housing market has since shifted. The rapid rise in interest rates has placed many buyers on the sideline, and sent housing providers searching for solutions.

In comes Zillow’s 1% Downpayment Program.

In an effort to stoke a bit of ‘buyer fire’ and breath life back into a dead market that’s had little transaction volume, Zillow is piloting a down payment assistance program in which they will contribute 2% of a buyer’s 3% downpayment. Essentially, it would allow the buyer to secure a home loan for 99% of the purchase price.

According to Zillow, the goal is reduce the amount of money prospective homebuyers must save in order to pursue their next purchase. And additional funds at the closing table would do exactly that. However, while the small supplemental downpayment loan offer from Zillow may be appealing in the short term, it can also set buyers up for long lasting negative effects as well.

Here are three things both Zillow and house hunters should keep in mind as they navigate the turbulent market ahead:

1. Down Payment Is Only 1 Piece of a 3 Part Puzzle

When purchasing a home utilizing a mortgage - which most buyers do - you must satisfy 3 lending requirements: Assets, Income, and Credit.

Assets can be summed up as ‘how much money do you have in the bank?’ This is the downpayment, or equity, piece of the home buying puzzle.

Income correlates to a borrower’s ‘Debt-to-Income Ratio’; often referenced as DTI. A buyer must provide proof of stable, sufficient, annual income that will accommodate the prospective monthly mortgage payment.

Lastly is Credit. Without a qualifying credit score - usually about 680 or above - no lender is going to be willing to take a chance on a ‘riskier’ borrower.

Zillow is offering buyers a life line in the form of down payment assistance, but if they’re drowning in debt and their credit is shot, home ownership is still a lost cause.

2. What About the Sellers?

There’s two sides to every transaction - Buyer and Seller. Albeit downpayment assistance may introduce a few additional buyers into a deserted housing market, we will still be devoid of sellers. While Zillow is helping solve for demand, demand is not the issue. The problem is that there is inadequate supply. Sellers aren’t interested in listing, and developers aren’t doing much building.

3. This Is Nothing New

There are plenty of local and federal downpayment assistance programs that already exist; in fact they’ve been around for years.

Some of these programs provide homebuyers with a grant rather than a loan; which can be a much more helpful form of assistance for a buyer that’s already taking on a large amount of debt.

But yet none of these programs have helped increase sales volume. What difference will extra loans from Zillow make?

In conclusion, many have mixed feelings on Zillow’s 2nd attempt to break free of their original marketplace business model. Is this a genuine push to make homeownership more attainable, or a money grab disguised as a noble crusade?

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