Over the last year, as mortgage rates jumped multiple times, many first-time homebuyers hit the pause button.
Check out the latest from Fannie Mae's Home Purchase Sentiment Index: Just 17% of Americans believe it's currently a good time to buy a home. The average 30-year, fixed-rate mortgage was 6.32% in February 2023, according to Freddie Mac, which is almost double what it was in January 2022 (3.22%). Much of the increase is due to the Federal Reserve raising interest rates to fight inflation and relieve the pressure on Americans for basic goods.
"Interest rates went up quickly, which was surprising even for someone who's been in the industry for years," said Tanya Ball, home loans regional director, BOK Financial Mortgage®. "Although we've seen the Fed fighting inflation with rate hikes, increasing rates is a short-term strategy. But this has really caused people to hit the emergency brake when looking to buy a home, thinking they could no longer afford one."
But—interest rates are only one piece of the puzzle when it comes to purchasing a home as a first-time homebuyer.
"I understand the hesitation some potential buyers have," Ball said. "However, we're seeing the cost of rent go up, as well, and if you're thinking about long-term investments, purchasing a home is investing in yourself." she said.
Short- and long-term considerations
Long term, Ball encourages homebuyers to ask themselves what they're gaining and losing if they choose not to purchase a home. Using an online calculator can help with the decision, as well.
"There's been a lot of fear that home values are going to crash, but the data is not supporting that as of now," Ball said. "There's still a high demand for properties and homes."
Make sure you consider all the options available to you, Ball advised.
- Loyalty programs. These programs, offered by mortgage lenders, may allow you to buy now and refinance at a later date without the lender fees. They are designed to retain mortgage clients by reducing refinancing costs.
- Permanent or temporary buy-down agreements. Second, motivated sellers might be interested in using a permanent or temporary buy-down agreement. In a permanent agreement, buyers pay a fee to receive a lower interest rate and make their mortgage more affordable in the long-term. In other cases, a seller might offer to "buy down" a buyer's mortgage as an incentive to close.
- Affordable loan products. Finally, look at a variety of products, including HUD FHA loans to make homeownership more affordable, VA loans that offer lower down payment options, or USDA programs in rural areas that offer additional financing options. These kinds of products are often missed when first-time homebuyers are talking to lenders.
"This kind of option has been classified different ways, but what it means is that as rates begin to come down, there might be a time in the future where it's beneficial to refinance and lenders are making this more attractive for homebuyers with incentives and savings to refinance," Ball said.
In a temporary buy-down, homebuyers pay a lower interest rate in the first two to three years of the loan. Sellers can provide this incentive to make the home purchase more appealing.
"In both examples, working with a lender that is able to explain the benefits and drawbacks of these options is critical, since not every buyer will be able to qualify for these options," Ball said. "Be leery of anything that's a quick answer or trendy—and make sure you're working with a lender or realtor to give you sound advice."
"More than ever, there are a lot of products that are helping first-time homebuyers. If you start asking more questions, you might be really surprised," Ball said.
Here are some additional tips to keep in mind if you're navigating the market as a first-time homebuyer:
- Talk to a lender about your credit score. While buyers can access their credit scores to understand where their credit risk is, lenders use FICO scores, which may vary by as much as 100 points.
- Understand what you can afford. Pre-qualification before you begin your home search can help you navigate the market and allow you to search for a home with confidence to make an offer.
- You may not need a large down payment. Many house hunters think they need 15-20% for a down payment, but that might not be the case. Today, there are more options than ever that can lower your down payment without increasing your monthly payment.
"I encourage those considering buying to ask questions. And remember, interest rates are temporary. You still have to pay for shelter, so you're either paying your mortgage or someone else's," Ball said.