Purchasing your first home is an exciting milestone, but it can also feel overwhelming, especially when it comes to finding and securing the best mortgage rates. As a first-time homebuyer, mortgage rates are likely a top factor you’ll consider when choosing a loan. Fortunately, even with interest rates climbing in 2022, there are still excellent options to finance your home in 2024.
Current Mortgage Rate Trends
In 2022, mortgage rates rose sharply as the Federal Reserve hiked its benchmark interest rate to combat high inflation. The average 30-year fixed mortgage rate peaked at around 7% in late 2022 – more than double the record lows seen in 2021.
However, as inflation has started to ease, mortgage rates have also drifted back down. As of February 2024, the average 30-year fixed rate is around 6.5%, according to Freddie Mac. While still high historically, this represents a welcomed reduction from the peak.
Most experts believe mortgage rates will continue trending downward in 2024 as inflation cools. However, the exact timing and speed of rate declines remains uncertain. The Federal Reserve has indicated it may pause rate hikes soon and eventually start cutting rates, which would provide more downward pressure on mortgage rates. But the Fed is determined to keep inflation under control, so it will likely remain cautious about making any dramatic moves.
As a first time buyer, it’s wise to factor in some continued volatility and uncertainty around mortgage rates this year. But the overall projection is for a downward drift as the economy stabilize. Pay close attention to rate movements, and be ready to act when you see an attractive window.
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How Mortgage Rates Are Determined for First Time Homebuyers
Mortgage rates are primarily driven by the broader economy and 10-year Treasury yields, which serve as a benchmark. They aren’t directly set by any single entity.
For buyers with excellent credit (scores over 740), mortgage rates will generally be lower, as lenders see you as less risky. Putting more money down for a down payment can also help secure a lower rate.
That said, first time homebuyers often don’t have perfect credit or large down payments. The good news is that you can still get approved and find competitive rates, even with less-than-ideal finances. Government-backed loans through the FHA, VA, and USDA offer more flexible credit requirements for first time buyers. Conventional 97 and Conventional 95 loans only need 3% down payments.
While your rate may be a bit higher than a buyer with pristine credit and a large down payment, it should still be competitive in the broader market. And you can likely refinance down the road as you build equity and improve your financial profile.
Factors That Determine Your Mortgage Rate as a First Time Homebuyer
As a first time buyer, several key factors will impact the specific mortgage rate lenders can offer you:
Credit score and history: The higher your score, the better. Excellent credit (740+) unlocks the very lowest rates. But even with fair or average credit, you can still get approved. Prepare by checking your credit reports, disputing errors, and improving your score before applying.
Down payment amount: Ideally 20% down makes you look the least risky to lenders and avoids private mortgage insurance (PMI). But many first time buyer loans allow down payments as low as 3%. Just keep in mind, the lower your down payment, the higher your rate.
Debt-to-income ratio: Lenders look at your total monthly debt payments compared to gross monthly income. Keep your DTI below 43% for the best rates. Use Bankrate’s DTI calculator to check yours.
Loan program: Conventional loans typically have the lowest rates, but government-backed FHA, VA and USDA loans allow smaller down payments for first time buyers at reasonable rates.
Loan term: The most common is a 30-year fixed rate, but compare it to shorter terms. Typically, the shorter the term, the lower the rate.
Your state: Rates can vary across different states. Shop around locally to find the best deal.
By understanding these key influences, you can better evaluate the mortgage offers you receive. Be sure to get rate quotes from multiple lenders. Comparing options and negotiating will help ensure you lock in the lowest possible rate.
Current Mortgage Rates for First Time Homebuyers
Here’s an overview of average mortgage rates for first time homebuyers as of February 1, 2024:
- 30-year fixed conventional: 6.5% with 0.7 points
- 15-year fixed conventional: 5.95% with 0.7 points
- 5/1 ARM conventional: 5.36% with 0.4 points
- 30-year fixed FHA: 6.34% with 0.59 points
- 30-year fixed VA: 6.29% with 0 points
- 30-year fixed USDA: 6.41% with 0.61 points
These averages can vary each day as broader rates fluctuate. It’s wise to check sites like Bankrate daily to view current rate movements.
In addition to the major factors discussed above, your personal financial situation and the specific lender will impact the rate you’re quoted. That’s why gathering multiple rate quotes is so important.
READ ALSO: How to Prepare for a Home Appraisal When Refinancing Your Mortgage
Strategies to Get the Lowest Mortgage Rate
As a first time buyer, you likely want to secure the lowest mortgage rate possible. Here are some tips that can potentially help you save on interest and maximize savings:
- Shop around extensively. Compare quotes from at least three lenders. Online lenders, banks, credit unions, and mortgage brokers all offer first time buyer programs.
- Improve your credit score. Give yourself 6 months or more to boost your score through steps like lowering balances and correcting errors.
- Make a larger down payment, if possible. While many first time buyers loans only need 3% down, putting 10-20% down shows lenders you’re less risky.
- Reduce your DTI. Pay down debts, avoid new loans before applying, and maximize income with bonuses, freelance work or a side gig.
- Lock when rates dip. Watch rate trends closely using sites like Bankrate. Lock in when you see an attractive window.
- Buy discount points to lower your rate. You pay more upfront to reduce your rate. Do the math to see if it makes sense long-term.
- Enroll in automated mortgage payments. This shows financial responsibility and can score a rate discount.
- Apply with a family member or partner. Adding another borrower often allows for better terms.
- Check for special state and local programs. If available, down payment grants or subsidized mortgages can score a lower rate.
With some savvy moves during the mortgage process, first time buyers can land a rate that fits comfortably within their budget.
7 Tips for Getting Pre-Approved as a First Time Homebuyer
Before seriously starting your home search, speak with lenders to get pre-approved for a mortgage. Pre-approval provides a price estimate for what you can afford and shows sellers you’re a serious buyer.
Follow these steps for a smooth pre-approval as a first time homebuyer:
- Check and improve your credit. This gives lenders confidence to pre-approve you at the lowest possible rates.
- Review your income and account statements. Lenders will analyze your income, assets, debts and expenses to qualify and price your loan.
- Research first time homebuyer programs. Compare options like conventional loans, FHA, USDA, VA, state/local programs, and lender-specific offerings.
- Get pre-qualified online. Many lenders allow you to fill out forms online to get a quick initial estimate of affordability.
- Formally apply for pre-approval. After pre-qualification, submit official documents so the lender can fully verify and underwrite your information.
- Compare offers from multiple lenders. Just like with mortgage rates, shop around to find the best pre-approval terms for your situation.
- Keep your same financial habits once pre-approved. Don’t quit your job, take out new loans or make other major changes. This keeps your verified information accurate.
With a pre-approval letter in hand, you can start seriously viewing homes within your budget, assured that financing is secured. Just be sure to make an offer by the pre-approval expiration date, usually 60-90 days.
How Down Payments Impact Mortgage Rates for First Time Buyers
The down payment amount you’re able to make can significantly sway mortgage rates from lenders. Here’s an overview of how down payments for first time buyers impact what interest rates lenders can likely offer:
20% down: The gold standard. Avoiding private mortgage insurance shows you as the least risky. Enables the very best rates from lenders.
15% down: Also avoid PMI. Not quite as ideal as 20% down, but still shows relatively low risk. Should still enable competitive rates.
10% down: Hits double digits which looks decent to lenders. Can help secure a pretty attractive rate compared to lower down payments.
5% down: Better than the minimum 3-5% requirements. May only bump your rate slightly compared to larger down payments.
3% down: Minimum for conventional loans. Considered somewhat riskier but still gets reasonably good rates.
0% down: Offered on VA and USDA loans. Higher risk means you’ll pay a bit more in rates compared to other options, but they remain affordable.
While 20% down unlocks the very best rates, even minimal 3% down payments let first time buyers secure reasonably competitive interest rates, especially if you have solid credit.
When to Lock In Your Mortgage Rate as a First Time Homebuyer
Locking in your interest rate is critical so it doesn’t float up before closing. Some tips on timing for first time homebuyers:
Do it as soon as possible once your offer is approved. Rates can fluctuate daily. Lock in right away to secure the rate you were quoted.
Watch trends and lock in during rate dips. If you don’t have an immediate purchase, wait for attractive rate windows to lock in.
Don’t delay if your closing date is weeks away. Even then, unexpected events could impact rates, so it’s safer to lock early.
Ask about extending your lock if needed. Lenders often allow lock extensions for a small fee if your closing gets delayed.
Budget for some rate fluctuations. An unforeseen spike likely won’t make or break a deal. Focus on the big picture homeownership goals.
With a locked rate, you eliminate interest rate risk. This gives peace of mind when navigating the demanding first time home buying process.
Government-Backed First Time Homebuyer Loan Programs
Government mortgage programs through FHA, VA, and USDA allow first time buyers to purchase with flexible credit requirements and down payments as low as zero.
FHA Loans
FHA loans only need a 3.5% down payment for credit scores starting at 580. They feature low rates relative to conventional mortgages. You’ll pay an upfront mortgage insurance premium and ongoing monthly premiums.
VA Loans
No down payment is required for VA loans offered to veterans, active military and reservists. Closing costs can also be rolled into the loan amount. VA loans have very competitive rates and the big perk of no monthly mortgage insurance.
USDA Loans
USDA loans help low and moderate income buyers in designated rural areas buy with zero down. Private mortgage insurance isn’t required. Income and property eligibility restrictions do apply.
While government loans enable easier access to financing, conventional mortgages likely come with the lowest rates, especially once you have 10-20% down. Still, programs like FHA and USDA offer excellent low down payment options at reasonable rates for first time buyers.
7 Tips for Choosing the Best Mortgage Lender
Choosing the right mortgage lender is just as important as choosing the right home. Here are 7 factors first time buyers should consider:
1. Available loan programs – Opt for a lender offering a broad selection including FHA, USDA, VA, and low down payment conventional loans.
2. Rate competitiveness – Compare interest rates against current market averages using sites like Bankrate.
3. Closing costs – Loan estimates spell these out. Lean toward lenders offering lender credits or grants to offset costs.
4. Reputation and reviews – Check sites like BBB and Consumer Affairs for feedback on customer satisfaction.
5. Loan process and technology – Prioritize user-friendly websites and apps for easy mortgage management.
6. Customer support – Evaluate communication channels like phone, email, chat and secure messaging portals.
7. Loan officer expertise – An experienced loan officer can guide first-timers through each mortgage step.
With the right lender relationship, you’re better equipped to determine the optimal loan options and lock in favorable long-term interest rates.
How Much House Can You Afford?
Determining your true price range is crucial before home shopping. As a first time buyer, you’ll need to weigh:
Down payment amount – Do you have 3%, 5%, 10% or 20% saved? Remember closing costs too.
Interest rates – Project your rate based on your credit, debt, assets, down payment, etc. Get pre-approved for an estimate.
Monthly payments – Max monthly payments (principal, interest, taxes, and insurance) shouldn’t exceed 28% of your gross monthly income.
Other debts and expenses – Tally all your monthly credit card, auto, student loan and personal debts plus living expenses.
Emergency fund – You’ll still need savings after the down payment and closing costs. Don’t stretch yourself too thin.
Use Bankrate’s home affordability calculator to run the numbers and determine a realistic purchase price range based on your finances.
Alternatives to Buying a Home Right Now
Given high inflation and interest rates, some first time buyers may prefer waiting or pursuing alternative options:
- Continue renting – If rates rise further or the housing market sees a correction, more attractive buying opportunities may emerge in the future.
- Rent-to-own – Find a homeowner willing to let you rent the property now with the option to buy later when you’re ready.
- Purchase multifamily home – Live in one unit while renting the other(s). Can help offset mortgage costs.
- Relocate to a lower-cost area – Expand your home search radius to find affordable hidden gem locations.
- Buy with family/friends – Combining incomes with other co-buyers lets you afford more houses.
- Get roommate(s) – Whether you buy or keep renting, roommates can reduce housing costs.
Don’t rush into homeownership. Make sure you’re truly financially ready, even if that means continuing to rent and save for now. The right opportunity will come with patience.
To Recap
Buying your first home is a big step that requires careful planning and preparation. As a first time homebuyer, be sure to:
- Check your credit and improve your score if needed
- Save for a sufficient down payment and closing costs
- Get pre-approved with multiple lenders to compare mortgage rates and terms
- Understand all the costs involved with homeownership
- Closely watch mortgage rate trends and lock when favorable
- Explore special state/local down payment or subsidized loan programs
- Work with an experienced loan officer who can walk you through the process
While finding the right home at the right price is crucial, securing the lowest possible interest rate on your mortgage will have a long-term impact on your total costs. With prudent planning and smart rate shopping, first time homebuyers can confidently land financing that fits their budget and timeline. Don’t let the process intimidate you. Your dream home is within reach with the right mortgage rate locked in.
Frequently Asked Questions
What credit score do you need to buy a house for the first time?
Most lenders require a minimum credit score of 620 for conventional loans and 580 for FHA loans. But scores of 740+ qualify you for the very best rates. Shop lenders and compare mortgage offers to find the most favorable terms your specific score can secure.
How much house can I afford on my salary?
A general guideline is to keep your monthly mortgage payment under 28% of your pre-tax monthly income. The exact amount varies based on your entire financial picture including existing debts, down payment, interest rate, etc. Use a mortgage calculator to determine your price range.
What is the lowest down payment for first time home buyers?
Conventional loans offer down payments as low as 3%. FHA loans require just 3.5% down. VA and USDA loans are available with 0% down for eligible buyers. While larger down payments of at least 10-20% score better rates, low down payment programs make owning more accessible for first-timers.
What are closing costs for first time home buyers?
Closing costs range from 2-5% of the total loan amount. They include lender origination fees, appraisal fees, title searches, insurance, taxes, and more. Closing costs for first time buyers often come to $6,000-$10,000 or more. Work them into your home buying budget.
How can I get a lower interest rate on my first home?
Secure the best possible rate by boosting your credit score, making a larger down payment if possible, reducing debts, shopping multiple lenders, locking when rates dip, buying discount points, and looking for special discounts/programs for first time buyers in your state or from employers/banks.
In another related article, Experts 2025 Mortgage Rate Predictions
