Zillow’s lending department, known as Zillow Home Loans, or ZHL for short, just rolled out a way for eligible home buyers to get an FHA loan with no money down.
Typically, you need a minimum 3.5% down payment to qualify for an FHA loan.
But Zillow wants to remove a common hurdle that keeps home buyers renting for years on end.
What’s more, the 3.5% is delivered via a silent second mortgage with no interest and no monthly payment.
And if you occupy the property for at least five years while making on-time payments, it’s completely forgiven.
How Zillow’s Zero Down FHA Loan Works
One of the biggest barrier for home buyers is the down payment, and this program eliminates the need for that.
Yes, you still need to qualify for the monthly payment and satisfy DTI limits, but it’s a nice little bump in the right direction.
Here’s how it works. You get a standard FHA first mortgage through Zillow Home Loans (ZHL) for up to 96.5% of the property value.
Then the remaining 3.5% is structured as a second mortgage set at 0% interest with no monthly payment. This is known as a “silent second.” And in Zillow’s own words, is a “forgivable loan.”
So the first loan is still subject to FHA mortgage insurance (upfront and annual), and you have to qualify under normal underwriting conditions.
The silent second mortgage quietly sits behind your first mortgage and is only payable in full if you sell, refinance, or move out before the five-year mark.
If you stay (it must remain owner-occupied to avoid repayment) for the full five years, that second mortgage is erased. You no longer owe it.
You just have the first mortgage to worry about and can even sell at that point if you wish.
In essence, you’re getting a gift of 3.5% of the purchase price from Zillow.
And best of all, there’s no income cap or first-time home buyer requirement as there is with similar programs like grants.
Zillow’s Zero Down FHA Loan Requirements
Before you get too excited, there are a series of requirements that must be met in order to qualify.
For one, you have to use Zillow Home Loans, obviously. That means you’re beholden to their mortgage rates and lender fees, whatever they happen to be.
In addition, home buyers need at least a 640-credit score, and the property must be a primary residence (the one you live in full time).
A typical FHA loan with just 3.5% down only requires a 580 credit score, so this is a tad more difficult to qualify for.
The good news is there’s no separate application with a housing agency or non-profit for the so-called down payment assistance, as Zillow handles both loans.
Though they do mention a “lending partner” in their FAQ section regarding the FHA down payment assistance.
It’s available in 43 states along with Washington, D.C., but isn’t currently offered in Arizona, Delaware, Florida, Massachusetts, New York, Rhode Island, or Virginia.
Is Zillow’s FHA Down Payment Assistance a Good Deal?
As always, it depends.
If you can comfortably afford the monthly payment, plan to stay put in the property for at least five years, and Zillow’s mortgage rate and lender fees are competitive, the free down payment is real money.
On a $500,000 home, that’s $17,500 you don’t have to come up with nor pay back.
So after five years, that loan disappears and you owe far less on the property.
The catch though is you have to use ZHL for your first mortgage and they know you’re not shopping around, obviously.
That means their rate has to be somewhat competitive at a minimum. Same with any fees, like a loan origination fee.
If you have to pay more versus a competitor, the “free money” starts getting eaten up by the higher interest expense over time.
Still though, you’re getting a pretty decent head start with 3.5% of the purchase price paid for.
Just remember you have to commit to staying for five years, otherwise it’s not forgiven.
One little wrinkle (or perhaps massive one) is mortgage rates are currently around 7% for an FHA loan right now.
If they happen to drop meaningfully over the next few year and you want to refinance, that second loan comes due in full.
So it’s almost like it’s a prepayment penalty where you can’t refinance, even if a rate and term refinance makes perfect sense.
This might make the whole deal pencil better for Zillow, knowing the loan won’t be paid off quickly.
For you, you’re potentially missing out on a lower interest rate while tying yourself to a property for half a decade.
Riskier Loan Products Are Surfacing in a Questionable Housing Market
Lastly, the timing feels kind of funny on this one.
This offer arrives at a time when the housing market is struggling mightily, and home prices could be under pressure, at least in certain markets.
That could mean getting saddled with a relatively high mortgage rate (7% or so), an equally steep purchase price, and price growth that’s projected to be flat, down, or only modestly positive.
So after five years, you might not be in as good a spot as you think, even with that 3.5% down payment extinguished.
There’s also some concern about defaults on FHA loans, which are already the worst in the business.
Giving home buyers the opportunity to enter this market with no real skin in the game feels a hair questionable.
Even without a down payment, housing affordability is rough right now and any wrong move means you could be forced to sell, and thus be subject to paying back that forgivable loan.
Sure, down payments are a real roadblock, but Zillow might also just be getting desperate to boost origination volume for its rapidly-expanding mortgage division.
Whether that’s good for you as a home buyer remains to be seen.
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 20 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
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