Mortgage rates stayed relatively steady around the 7% mark this week, according to the Mortgage Bankers Association. Higher mortgage interest rates during the past several weeks have stalled home purchase activity ahead of the spring season.
Mortgage interest rates are forecasted to decline somewhat throughout 2024, as the Federal Reserve projects rate cuts will begin sometime this year. Here are the current mortgage rates, as of Feb. 28:
- 30-year fixed: 7.04% with 0.67 points (previous week: 7.06% with 0.66 points).
- 15-year fixed: 6.7% with 0.68 points (previous week: 6.61% with 0.77 points).
- 5/1 ARM: 6.33% with 0.58 points (previous week: 6.37% with 0.71 points).
- 30-year jumbo loans: 7.2% with 0.57 points (previous week: 7.16% with 0.45 points).
- 30-year FHA loans: 6.86% with 0.99 points (previous week: 6.91% with 1.03 points).
Types of Mortgages for First-Time Homebuyers
When searching for a mortgage to buy your first home, you’ll typically choose between a government-backed loan, which is guaranteed by a federal agency, or a conventional loan, which isn’t. The loan programs below aren’t limited to first-time homebuyers, but they can be a good option for those with small down payments or fair credit scores.
A 3.5% down payment is required for a Federal Housing Administration loan, as long as you have a credit score of 580 or higher. Homebuyers with credit scores between 500 and 579 may qualify for an FHA loan, although a 10% down payment is required. This type of mortgage usually has looser debt-to-income ratio requirements than a conventional loan. It carries an upfront mortgage insurance premium and monthly mortgage insurance payments.
You don’t need a down payment for a home loan from the Department of Veterans Affairs. Veterans or active-duty service members may be eligible for a loan with no mortgage insurance, but there are upfront costs, such as the VA funding fee. To qualify for a VA home loan, you’ll need a Certificate of Eligibility from the VA website.
With this loan, no down payment is necessary to purchase, build, improve or relocate to a home in certain rural areas. Borrowers must meet income and other eligibility criteria, plus pay an upfront guarantee fee at closing and an annual fee split into monthly installments.
For conventional loan programs administered by Fannie Mae and Freddie Mac, down payments can be as low as 3%. These loans have stricter credit requirements with a minimum score of 620 but potentially carry lower interest rates than some government-backed loans, such as FHA loans. However, private mortgage insurance is required until you reach 20% equity.
You may qualify for affordable homeownership programs in your area. States may offer first-time homebuyer loans, down payment assistance grants, subsidies and tax credits, depending on where you live. The Department of Housing and Urban Development keeps a list of resources by state.
Pros
- Qualify with less-than-perfect credit. Many loans geared toward first-time buyers allow for lower credit scores and flexible debt-to-income ratios.
- Make a low down payment. Closing costs and other fees may also be reduced, which could help you buy a home faster. This is important for first-time buyers who don’t yet have the benefit of tappable equity.
- Get assistance with homebuying costs. You can find government-backed and charitable loan programs for help with your down payment and closing costs. You may be eligible for a grant, a low- or no-interest loan, or a forgivable or deferred-payment loan for first-time buyers.
Cons
- Your property may need to meet certain requirements. The home appraisal, for instance, checks that the home meets minimum property requirements before the FHA or VA backs the loan.
- Eligibility may be restricted by household income. Certain programs may limit participation by how much money you make, where you live and how many people are in your household.
- Loan amounts. Limits may apply based on the home’s location and the type of mortgage you wish to borrow. For example, conventional loans eligible for sale through Fannie or Freddie must adhere to the conforming loan limit.
You can begin your research in a couple of ways. Start with your state’s housing finance agency, which can connect you with affordable mortgage programs, says Anna DeSimone, author of “Housing Finance 2020.” HFAs are subsidized by their states, “and they work with FHA, VA, and Freddie and Fannie loans,” DeSimone says.
You could also work with a local lender or mortgage broker who knows about grant programs, says Tammy Andrews, branch manager and mortgage originator at Coastal Lending Group.
Consider these questions when choosing your mortgage lender:
- What type of products does the lender offer? If you’re thinking about an FHA or USDA loan, confirm that your lender has those options.
- What interest rates and closing costs should you expect? Even a fraction of a percentage point can dramatically change the cost of the loan.
- Does the lender have experience with similar first-time borrowers? Perhaps you have a lower credit score but also a low debt-to-income, or DTI, ratio. Establish that the lender can work with you.
- Does the lender offer special programs for first-time homebuyers? Some lenders provide grants or credits to help with closing costs.
- How is the lender’s customer service? Check lender reviews and ratings from the Better Business Bureau, Trustpilot or the Consumer Financial Protection Bureau’s Consumer Complaint Database.
Generally, interest rates are higher for people with lower credit scores, regardless of whether they are first-time or seasoned homebuyers. Look at the entire loan package to choose the best option. Many first-time homebuyers falsely believe that the loan with the lowest interest rate is the only way to go, but consider other factors.
“If you’re getting a mortgage and have plenty of money to pay closing costs, and the house is in perfect condition, you can afford to shop around to try to get the best rate,” DeSimone says.
But if money is tight or the house needs a little work, you might want to pay a higher rate if it means you can keep more cash on hand.
“If it makes a difference between being a homeowner now or waiting, it might make more sense to spend a little bit more now,” DeSimone says.
- Assess your finances. A good credit score and a low DTI ratio can help you qualify for a mortgage, but you will also need to determine the size of your down payment and make sure you have cash for closing. You don’t necessarily have to put down 20%: Some loans, including conventional mortgages, may require just 3%. Closing costs are between 3% to 5% of your loan amount.
- Determine the type of mortgage you want. Look at the variety of mortgages available and their requirements. Make sure you meet criteria for credit score, down payment, income, DTI ratio and other important factors.
- Compare rates from multiple mortgage lenders. You can usually get a quote on a lender’s website. A mortgage broker can also offer free help finding the lowest rate for the type of loan you want. Keep your mortgage rate shopping to a two-week window to reduce the negative impact to your credit score.
- Get preapproved for a mortgage. The preapproval process determines how much you can borrow and is necessary before you start home shopping. You will work with lenders to verify your financial information and to obtain loan estimates and preapproval letters.
- Compare estimates from at least three lenders. The estimate will show you the loan terms, including the monthly payment, plus fees and closing costs. Make sure you compare loans by annual percentage rate, or APR, which is the annual cost of the loan with fees, and not just by interest rate.
- Employer-sponsored first-time homebuyer programs. Some employers help qualified employees cover down payments and closing costs. These programs often include grants or loans that may be forgiven after a period of time, as long as you stay with the employer.
- Rent-to-own agreements. You commit to renting a property for a period of time, with the option to buy it before the lease ends. However, you need to be able to qualify to buy the home at the end of the lease.
- Seller financing. Instead of a lender being involved in a sale, the buyer and the seller proceed on their own. This method can be quicker and cheaper than traditional financing, but you could face higher costs.
- Charitable homebuyer programs. For example, Habitat for Humanity is for eligible buyers who need better housing, are willing to help build their home and can make an affordable monthly mortgage payment. The Neighborhood Assistance Corporation of America program helps low- to moderate-income buyers qualify for affordable fixed-rate mortgages with no down payment and no closing costs or fees.
U.S. News selects the Best Loan Companies by evaluating affordability, borrower eligibility criteria and customer service. Those with the highest overall scores are considered the best lenders.
To calculate each score, we use data about the lender and its loan offerings, giving greater weight to factors that matter most to borrowers. For mortgage lenders, we take into account each company’s customer service ratings, interest rates, loan product availability, minimum down payment, minimum FICO score and online features.
The weight each scoring factor receives is based on a nationwide survey on what borrowers look for in a lender.
To receive a rating, lenders must offer qualifying loans nationwide and have a good reputation within the industry. Read more about our methodology.
To recap, here are the picks:
Best First-Time Homebuyer Loans of March 2024
You might think of a first-time homebuyer as someone who has never owned a home, but that’s not always true. The term first-time homebuyer can have different meanings, Andrews says.
“From a lender’s perspective, it can be not ever owning a home, period,” Andrews says. “But for different grant programs, it might mean not having owned a home in the last three years.”
Buyers who make a down payment of less than 20% will likely need mortgage insurance.
- For FHA loans, the upfront cost is 1.75% of the loan, which will be added to the total borrowed, in addition to monthly mortgage mortgage insurance premiums. USDA loans have upfront and annual fees, but they are more affordable than FHA loans.
- VA loans don’t require insurance, but first-time borrowers pay an upfront VA funding fee of 1.25% to 2.15% based on the size of their down payment.
- With a conventional loan, you may have to pay for private mortgage insurance if your down payment is below 20%. The PMI is removed once your mortgage balance hits 78% of the home’s original purchase price. You also can request that your lender remove the PMI once you reach the 20% equity mark.
Whether you’re a first-time or repeat homebuyer, how much you get approved for will depend on your ability to repay. If you have steady income, excellent credit and no debt, then these are big pluses.
Lenders can also look at compensating factors – strengths in your financial profile that offset weaknesses – to extend your borrowing power, DeSimone says. Those may include large cash reserves, recurring income streams or a long history of on-time rent payments.
Another key consideration for lenders is your DTI ratio, or the percentage of your gross monthly income that goes toward paying off your monthly debts. Aim for less than 43%, but don’t worry if you’re above that threshold as a first-time homebuyer.
“Some programs are allowed to loosen ratios up to 50% for people who have compensating factors,” DeSimone says.
