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First-Time Buyers in a New Kind of Housing Market

By Louis DeNicola

  • UPDATED April 30
  • |
  • 7 MINUTE READ

Housing prices surged during the pandemic as people started working from home, sought outdoor space and moved to be closer to family or friends. Although the median sale price of a home has dropped since its peak of $479,500 at the end of 2022, it's still above $400,000.1

The high prices, along with limited availability and high interest rates, can make purchasing a home difficult—especially for first-time homeowners. However, there are still opportunities, and there may be programs available to help you cover some of the upfront costs.

1. See How High Interest Rates Affect the Competition

The percentage of homes sold to first-time homebuyers increased, according to the 2023 Profile of Home Buyers and Sellers survey from the National Association of REALTORS® (NAR).2

The increase from 26% in 2022 to 32% in 2023 could partially be the result of rising interest rates.2 Although interest rates have dropped since 2023, many current homeowners refinanced into low-rate mortgages in 2020 and 2021.3 They might feel stuck in their current home, which can limit the availability of homes for buyers.

First-time buyers don't face this predicament, as they're weighing the pros and cons of continuing to rent versus buy. Even so, NAR highlights that first-time homebuyers historically made up a larger portion of home sales. In fact, the 32% figure is the fourth lowest since the survey started in 1981.2

After all, decreased competition might make buying a home a little easier, but limited availability and high interest rates can still make buying a home for the first time difficult.

2. Know the Many Costs of Buying a Home

First-time buyers may need to spend years saving up for a home, and many receive help from family members. If you haven't researched buying a home before, you might be surprised by all the upfront costs:

  • • Down payment: The typical down payment for first-time homebuyers in 2023 was 8%, the highest amount since 1997.2 That's $32,000 for a $400,000 home. Some mortgages are available with 3% or 5% down payments, and there are a few options that don't require any down payment.4 However, to avoid mortgage insurance, buyers generally need to put at least 20% down.
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  • • Closing costs: Closing costs often range from 3% to 6% of the loan amount, depending on where you're buying a home and the type of mortgage.5 This could mean paying thousands of dollars at the closing. You may be able to add some of these to your mortgage if you don't have the cash available.
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  • • Mortgage reserves: The mortgage lender may want to see that you have up to 12 months' worth of monthly payments in liquid assets, such as a high yield savings account or money market account. These include payments for the mortgage, property taxes, insurance and homeowners association dues. Some types of mortgages don't require reserves or only require three to six months' worth of payments.6
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  • • Moving costs: Moving costs might seem relatively small compared to the cost of buying a home, but you'll still need to budget for the expense.
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  • • New household expenses: Consider how owning a home could affect your monthly budget. For example, your utility bills might increase, and you may want to set money aside for maintenance and repairs.

3. See How You Compare to Other First-Time Homebuyers

NAR's 2023 Profile of Home Buyers and Sellers also highlighted some statistics on homebuyers:2

  • • The median age of first-time buyers was 35, the second highest since 1981.
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  • • About a quarter (23%) of first-time buyers received a gift or loan from a family member or friend.
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  • • Buyers spent an average of 10 weeks looking for a home.
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  • • When looking at all homebuyers, 59% were married, 9% were unmarried couples, 19% were single females and 10% were single males. Most (70%) didn't have children who were 17 or younger in the home.

NAR's 2024 Snapshot of Race and Home Buying in America highlights how the challenges to buying a home may be especially pronounced for people of color.7

For example, Black and Hispanic mortgage applicants receive higher denial rates than white and Asian applicants. When they are approved, the mortgage rates tend to be higher. Rising rent costs and disparities in income, student loan balances and household wealth can also make saving up for a down payment more difficult.7

4. Use Financial Resources for First-Time Buyers

Buying a home for the first time can be a nerve-wracking experience, and the upfront costs pose a large barrier for many households. However, you may be able to find local, state and federal programs that offer different types of assistance.

For example, Federal Housing Administration-backed FHA mortgages may have a lower down payment and less stringent credit score requirements than conventional loans. There are also other government-backed loan programs, such as VA loans and USDA loans, that don't require a down payment.

Low- to moderate-income households may also qualify for grants or second loan programs. With a grant, you could receive money toward your down payment or closing costs that you don't need to repay.

Loans can also help you cover upfront costs or qualify for a mortgage without mortgage insurance. Depending on the loan program, the loan might be completely forgiven after several years.

Alternatively, you might have to repay the loan when you sell your home or refinance your mortgage. However, these loans generally don't charge interest or require monthly payments. Instead, you repay the original loan amount plus a portion of your home's increased value.

You can search for homebuyer and down payment assistance programs in your city, county and state. You may also want to ask your real estate agent or loan officer if they're aware of any programs for first-time homebuyers.

Frequently Asked Questions

Below are some answers to common questions many first-time buyers have when searching for a home.

How much do most first-time homebuyers put down?

First-time homebuyers typically put 8% down when buying a home in 2023.2 You may qualify for some types of mortgages with 3% or 5% down, and some don't require any down payments.4 However, the less you put down, the higher your mortgage payment will be. If you put less than 20% down, you may also have to pay for mortgage insurance.

Is it a good idea to get an FHA loan?

An FHA loan might be a good idea for first-time homebuyers who have trouble qualifying for a conventional loan, as FHA loans tend to have lower down payment and credit score requirements. However, FHA loans also require mortgage insurance, which will last for the life of the loan if you put less than 10% down.8

Is buying better than renting?

There's a lot to consider when comparing renting and buying a home, including the upfront, monthly and opportunity costs—the other ways you could spend or invest the money if you decide not to buy. There are also nonfinancial considerations. For example, you may be able to customize a home based on your needs and preferences, but you'll also be responsible for maintenance and repairs.

Stay Informed Throughout the Process

Searching for and buying a home can be a financially and emotionally challenging process, and you might experience lots of ups and downs before you find the right one. But having a clear understanding of how much money you'll need and where you can turn for help can give you a solid foundation for your search. Also, try to stay informed about recent trends in your area and how they might affect your search.

 

Louis DeNicola is a freelance writer who specializes in consumer credit, finance and fraud. He's a regular contributor for Experian, FICO and USA Today, and works with various lenders, publishers, Fortune 500s and fintech startups. Outside of work, you can often find Louis at his local climbing gym or cooking up a storm in the kitchen.

 

READ MORE: How to Save for a Down Payment

 

Sources/references

1. Median Sales Price of Houses Sold for the United States. Federal Reserve Bank of St. Louis. Updated January 25, 2024.

2. 2023 Profile of Home Buyers and Sellers. National Association of REALTORS. November 2023.

3. Haughwout, A. et al. The Great Pandemic Mortgage Refinance Boom. Federal Reserve Bank of New York. May 15, 2023.

4. Green, D. and Tronier, R. How Much Down Payment Do You Need for a House? The Mortgage Reports. January 11, 2024.

5. Crace, M. Closing Costs: What Are They, And How Much Will You Pay? Rocket Mortgage. April 1, 2024.

6. DeNicola, L. What Are Mortgage Reserves? Experian. February 5, 2024

7. 2024 Snapshot of Race and Home Buying in America. National Association of REALTORS. February 2024.

8. Araj, V. What Is An FHA Mortgage Insurance Premium? Rocket Mortgage. March 28, 2024.