Will Zillow’s 1% down payment mortgage work?
- Real estate app Zillow continues to experiment with lending, launching a 1% down payment product.
- After mounting losses forced the company to shut down its home flipping business in 2021, the company still wants to build the housing super app.
Last week, Zillow announced it had launched its 1% Down Payment program in Arizona. Borrowers who qualify only have to save 1% to cover their portion of the down payment and Zillow Home Loans will contribute an additional 2% at closing.
Moving from media to transactions: Zillow has been trying to extend the data it produces from its home listings business into a transactional platform for real estate. It hasn't been going great -- the company shut down its home-flipping service, Zillow Offers, in 2021 after racking up losses of $420 million in three months.
Still underwriting: Zillow continues to participate in originating mortgages in its app, but it hasn't found scale. Last quarter It originated $336 million worth of home loans. That compares that to $22.3 billion in mortgages made by Rocket Company. The lending business isn't profitable either, pulling in $119 million in revenue last year but with a $167 million operating loss.
The risk in a small downpayment: Offers like 1% down payments can attract riskier borrowers. By requiring just 1% down in this new program, buyers could end up owing more than what their homes are worth, if there's a dip in real estate. With little skin in the game, they might just walk away from their mortgages if things go sour.
Fintech still gunning for home financing: Rocket Mortgage has become the largest residential lender in the US. Other fintechs are also looking to prove out their models. As of the third quarter of 2022, Rocket Mortgage had a servicing portfolio of $531 billion and 2.5 million clients. Hometap's Home Equity Investment (HEI), for example, enables homeowners to sell off some of their equity in return for giving up some of the upside when they eventually sell their home. The company has 8,000 clients across the U.S.