Tis’ the season to look for the best mortgage programs for 2023. Between record-high home prices, high mortgage rates, rising inflation, and recession fears, first-time home buyers have been pummeled this year. It all creates uncertainty heading into 2023 for many homebuyers seeking an affordable mortgage.

After (hopefully) peaking at above 7%, mortgages have been retreating slightly over the past few weeks. Will that trend continue and what types of mortgages should first-time buyers be looking most closely at? Freddie Mac’s November prediction for average home loan interest rates going into 2023 is 6.4%. Other experts simply project mortgage rates will remain high. Regarding home prices, experts also say we will start to see more month-over-month declines next year. The national median existing single-family home price can be expected to fall 5.5% during the year. The combination of stable or declining interest rates declining home prices, and increasing inventory should favor first-time buyers.

Strong indications are that the Federal Reserve will continue raising interest rates but at a slower pace. Much of those raises are already priced into current mortgage rates. That might mean the first several weeks of the new year could be the best interest rate opportunity that first-time buyers will see in the near term. Let’s look at what types of loans people should be considering.

Down Payment Assistance Programs

These involve a sum of money given as either a grant, second mortgage (with varying repayment terms), or matched savings. 

First-time homebuyer grants provide free money to help you cover your down payment or closing costs. Grants are usually awarded to low- or moderate-income borrowers, typically defined as earning no more than 80% of the area median income. But these do come with requirements, such as limits on the home purchase price and a minimum credit score. You might be able to apply for multiple grants, so don’t be shy about trying to find more financial assistance. 

A variety of down payment assistance loans are available. These are basically second mortgages that you take out with the first mortgage. Here is what to ask about:

• Low-interest loans. A low-interest second mortgage for a small amount helps borrowers with the down payment and closing costs. These must be repaid — usually over a few years.
• Deferred-payment loans. These types of loans don’t charge interest but need to be repaid in full when you sell the home or refinance the first mortgage.
• Forgivable loans. These are similar to the other kinds of assistance loans, with one key difference. The second mortgage will be forgiven so long as you stay in the home for a certain amount of time (the exact amount depends on the program) and stay up to date with your mortgage payments.

Down payment savings match programs are designed to grow the amount a borrower puts down for a home by matching the borrower’s savings. These programs are structured over time and provide matched funds up to an approved amount. The funds are available for the down payment and closing costs. An example is Individual Development Accounts (IDAs) which can contribute up to three dollars for every dollar that you save. You need to work with a counselor to deposit funds into an IDA over a specified time. When you follow the plan and save the required amount, you’ll receive the match at closing.

First-time homebuyer programs by state offer first-time homebuyer grants that don’t have to be repaid and are often accompanied by low-interest mortgage programs. However, some are intended to attract people relocating from out-of-state.

Nonprofit programs offer exceptional value to first-time homebuyers seeking an affordable mortgage. One example is Neighborhood Assistance Corporation of America, a nonprofit that provides low-rate mortgages to low- and moderate-income borrowers without requiring a down payment or closing costs. The nonprofit does this by using “character-based” standards to qualify borrowers, instead of the risk assessment model that most mortgage lenders perform.

Traditional Home Loans

Now is a time when you want to study mortgage types so that you’ll be prepared to consider which loan types are most suitable for you. A mortgage broker can help with this process but you’re best prepared when you have knowledge of what is widely available. Here are the most common loans to consider.

Fixed-rate loan. These are the most common and work in conjunction with other loan types such as VA, FHA, and conventional loans. People prefer these because they offer the lowest amount of risk. The interest rate won’t change over the 15 to 30 years it takes to repay the loan. Each month a portion of the outstanding balance is steadily repaid until you own the home outright. However, there can still be small variations in your monthly payments due to changes in property taxes, homeowner insurance, HOA fees (if applicable), etc. These loans are best for people planning to remain in the home for at least seven years or longer and when interest rates are expected to rise.

Adjustable rate loans (ARMs) offer lower beginning interest rates than most other loans. That means a lower beginning monthly payment and/or the ability to buy a more expensive home. The interest rate typically remains the same for the first three to five years but then changes (adjusts) once a year based on current interest rates. ARMs come in many variations. It could start adjusting in two years. This means your monthly payment could go up in future years or it could go down (there is risk involved). These loans are best suited to people that don’t plan to own the home long-term. People who want to take advantage of the low initial interest rate but plan to sell before it adjusts upward.

Federal Housing Administration loans (FHA), require down payments of as little as 3.5%. These loans are suitable for people with a small down payment (often first-time buyers) but come with conditions such as requiring private mortgage insurance (PMI) and limited purchase prices that exclude what would be considered a large or luxury home.

VA loans are for home buyers that served in the U.S. Military. These require zero down and don’t require PMI.

USDA Rural Development loans are sometimes overlooked because of their limited application. These are for rural areas that are struggling economically. These are available for zero down and even offer discounted interest rates. However, these do require PMI.

There are several other loan types that you can learn about by explaining your specific circumstances to mortgage brokers.

What other mortgage types do you think first-time home buyers should be aware of? Please leave your comment.