Housing News

How First-Time Homebuyers Can Buy Without Stretching Their Budget

First-time homebuyers are finding ways into the housing market even as affordability remains challenging.

In recent months, they represented about 63% to 64% of the purchase mortgages included in the latest NAF Insights report by New American Funding Principal Analyst Ryan Schoen.

“Absolute loan counts for first-time buyers have held up better than many expected in a higher-rate world,” wrote Schoen.

The data does not represent every mortgage made nationwide. It shows how important first-time homebuyers have become within the portion of the market Schoen analyzed.

Low down payment loans, down payment assistance, seller concessions, and mortgage rate buydowns may help qualified homebuyers manage the costs of purchasing.

Here’s how first-time homebuyers can establish an affordable budget and explore their options.

Why first-time homebuyers are taking a larger role

Some repeat homebuyers have been hesitant to sell because moving may require replacing an existing mortgage with a new loan at today’s rates.

First-time homebuyers do not have an existing mortgage to give up. Many are moving forward because they need more space, want greater stability, or are ready to begin building equity.

“The people who are still transacting are disproportionately those entering homeownership for the first time,” wrote Schoen.

A rising share does not necessarily mean the total number of first-time purchases has surged. It means these homebuyers represent a larger portion of the purchase mortgages within the dataset.

Start with a comfortable monthly payment

Elevated mortgage rates have changed how much homebuyers can purchase with a given monthly budget.

Freddie Mac reported that the average rate for a 30-year fixed-rate mortgage was 6.76% for the week ending Sept. 10. A separate daily mortgage rate measure included in the NAF Insights report reached 7.07%.

The rate an individual homebuyer receives depends on the loan program, credit score, down payment, debts, and other financial factors.

“Every basis point here lands on monthly payments and, more importantly, on who can still clear the qualification hurdles,” wrote Schoen.

First-time homebuyers can begin with a comfortable monthly payment and work backward to determine a suitable price range. A loan officer can show how the home price and mortgage program would affect that payment.

Property taxes, homeowners insurance, mortgage insurance, homeowners association dues, and expected maintenance should also be included.

Explore low down payment loan options

A 20% down payment is not required for every mortgage.

Some Conventional loans allow qualified first-time homebuyers to purchase with as little as 3% down. Private mortgage insurance is generally required with less than 20% down, although homeowners may be able to remove it after meeting eligibility requirements.

Federal Housing Administration (FHA) loans may offer more flexible credit requirements and down payments as low as 3.5% for eligible borrowers. FHA loans require mortgage insurance.

Department of Veterans Affairs (VA) loans may allow eligible servicemembers, veterans, and surviving spouses to purchase without a down payment. VA loans generally do not require monthly mortgage insurance.

Down payment assistance programs may help qualified homebuyers cover part of the down payment or closing costs. Assistance may come as a grant, forgivable loan, or deferred-payment loan.

A loan officer can help determine which programs may be available and how each would affect the amount due at closing.

Ask about seller concessions and buydowns

Depending on the loan program and purchase agreement, a seller may contribute toward eligible closing costs.

A temporary mortgage rate buydown can lower the rate for an initial period. A 2-1 buydown generally reduces the rate by two percentage points during the first year and one percentage point during the second year before the full note rate takes effect.

Homebuyers should make sure the payment at the full rate fits their budget.

Leave room for the unexpected

A survey cited in the NAF Insights report highlights the value of preserving savings after closing.

Truework, an income and employment verification platform used by mortgage lenders, surveyed 1,000 people who purchased homes within the previous two years.

About 88% said a common financial setback could jeopardize their ability to make a mortgage payment. Nearly one-third said they had reduced spending on necessities to cover their payments.

The survey included recent homebuyers generally, so the findings do not apply exclusively to first-time homebuyers.

Maintaining savings can help a new homeowner handle moving expenses, repairs, medical bills, or a temporary income disruption.

Strengthen credit before applying

The NAF Insights report shows how credit and down payment can influence conventional mortgage costs.

Borrowers with credit scores above 740 and loan-to-value ratios of 80% or less received rates around 6.72%. Borrowers with scores below 680 and loan-to-value ratios above 80% received rates closer to 7.01%.

Before applying, homebuyers can review their credit reports for errors, pay down manageable debts, and avoid opening new credit accounts.

Getting pre-approved can help establish a price range and demonstrate to sellers that the homebuyer has completed an initial financial review. It also allows a loan officer to identify mortgage programs that fit the homebuyer’s credit profile, savings, and desired monthly payment.