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Are lender assistance programs like Zillow’s the future of home buying?

Buying a house

A new initiative proposes to make a 2% contribution at a time when housing affordability has never been worse.

First-time buyers make up about half of all home buyers, according to Zillow’s 2023 Consumer Housing Trends Report. -Adobe Stock

The cost of buying a home has reached an all-time high thanks to mortgage rates more than double what they were two years ago, a dearth of listings and prices that show no sign of letting up this pressure.

The median sales price for a single-family home in Greater Boston alone reached $910,000 in July – a monthly record for the region, according to the Greater Boston Association of Realtors. We’re in an era where first-time buyers make up about half of all home buyers, according to Zillow’s 2023 Consumer Housing Trends Report.

In late August in Arizona, Zillow launched a program to make homeownership more accessible, an initiative that offers borrowers 2% of the overall home price to put toward a mortgage loan. That means someone can put down 1 percent, and Zillow Home Loans’ contribution will help the borrower meet the minimum 3 percent down payment typically required for those with good credit to get a home loan from ‘a lender.

“Rapidly rising rents and home values ​​mean that many renters who already pay high monthly housing costs may not have enough saved for a large down payment, and these types of programs are innovations welcome to reduce potential barriers to homeownership for those who qualify,” Zillow Home Loans economist Orphe Divounguy said in a statement.

There are eligibility requirements to use the program: Participants must be first-time home buyers, complete a homeownership education course, and purchase a single-family primary residence. There are also income requirements — Zillow would not provide the details — and a credit score requirement of at least 620 (usually the lowest score accepted by lenders).

Keep in mind: Lenders may require borrowers with lower credit scores to put down more than 3%. Borrowers can put down up to 5% through the Zillow program.

The Zillow program is only available in Arizona at the moment, but a company spokesperson said there are plans to expand it to other states. The 2 percent down payment assistance is paid at closing, not directly to the borrower.

Down payment assistance is a lifeline in a time when inflation remains high. The Federal Reserve has continued to raise the interest rate to try to bring it under control, but housing prices show no signs of falling in Massachusetts. “With daily expenses so high — families are spending $709 more per month than two years ago, according to CNN — it’s harder to save for a down payment.

So, is the Zillow program the future of home buying?

“It’s a very interesting concept, and if it’s a way to attract more buyers to the market, that would be great as long as the buyer understands how the program actually works and understands the hidden costs if there is in a,” said Melvin A. Vieira Jr., past president of the Greater Boston Association of Realtors and a real estate agent with RE/Max Destiny.

Down payment assistance programs are not new. Many state and local governments and nonprofit organizations have a variety of funding to help first-time buyers with down payments. But real estate analysts advise buyers to be careful and always read the fine print.

“Every product and service requires a rate of return for the business,” said Lawrence Yun, chief economist for the National Association of Realtors. “Even loss-making products, in which a company can lose money on one item to profit on another, are designed with this in mind.

“Nothing is free. Often, consumers focus on the down payment and the interest rate, neglecting other sneaky costs.

The details of how borrowers must repay Zillow’s 2% assistance are still a little fuzzy, and there’s also the issue that buyers with down payments below 20% generally have to pay private mortgage insurance, which which adds another cost to the monthly mortgage payment. .

“We haven’t spelled out all the requirements, mainly because if this program isn’t right for someone, there are others and various down payment assistance options that might work for them,” said a Zillow spokesperson at the Globe. by email. “We don’t want to discourage people from reaching out and having that conversation with a loan officer who can help them. We also have a down payment assistance tool on each listing that guides people to additional resources and grants.

A more sustainable path to homeownership would be to lower the cost of borrowing, Yun said.

“Overall, consumers will benefit from a broad decline in mortgage rates,” he added. “This may happen if the Federal Reserve stops raising its short-term policy rate, especially if inflation is much calmer.”

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