I'm currently at level 3 but cant find much sucess in the dungeon. I am building my characters to level 5 to help. Any suggestions?

If you have explored everything in the starting city, you should be able to handle the dungeon beneath. Lvl 3 sounds pretty low, though. I remember having trouble in the city even with my lvl 6-7 characters imported from MM1.
A common tactic is to "grind" the skeletons in the Skeleton Closet for some easy XP. Normally I don't like grinding, but MM2 is really designed for imported chartacters, so no shame in grinding then.

Skills that increase stats help in the beginning.
There may be some for sale in the city that will help, but most (or all) of the skills are found in other towns. I would advice against buying Forestry and Mountaneeting for a while, even if you can affor it, as the encounter in the wilderness are usually tougher in the rugged terrain, and some of them will slice and dice a low level party into little pieces.

Check the shop each day for items for sale. Stock up on magic herbs. They can be life savers if your cleric goes down.

Buy a Green Ticked in the shop and go to the Arena.

Also make sure you join the Mages Guild and buy all the extra spells that are available. The Sleep spell especially is useful. And, if you're not already aware, you have to search ("S" key) after every fight in order to find treasure. This will be your primary way to get better equipment, and better equipment helps a lot. Make sure to have your robber or ninja open the chests you find to avoid traps.