Buying your first home can be a complicated process. Fortunately, there are ways to apply for financial support to make this process easier. MoneyGeek explores various Rhode Island first-time homebuyer programs to help you find the best option for your needs.
What Is a First-Time Homebuyer Program & How Can It Help?
When buying a home, the portion of the purchase price you pay upfront is called a down payment – the larger the down payment, the smaller the monthly payment. The down payment is usually expressed in a percentage and impacts the type of mortgage you qualify for and the amount you’ll need to borrow.
A down payment can be expensive, and first-time homebuyers often struggle to save a large enough amount. Thankfully, several federal loan programs can help you finance your home purchase. State-specific programs can also provide loan assistance and down payment assistance.
However, each loan program has different qualification criteria. For instance, you cannot use FHA loans to purchase investment or rental properties. VA loans are only available to military members, veterans and their families. In addition, Rhode Island homebuyer programs are limited to state residents.
Ultimately, understanding your loan options can get you on the road to making mortgage payments versus continuing to save up for many years.
Zero-Down-Payment Loan Programs
You can pay for a home without putting money down at closing if you qualify for a zero-down payment government loan, such as a USDA or a VA loan.
USDA loans are for low-to-moderate-income borrowers in eligible rural areas who cannot get approval for a conventional loan. Applicants must be U.S. citizens or U.S. nationals, meet income qualifying requirements and agree to use the property as their principal residence.
There are three primary types of USDA loans:
- Home improvement grants and loans: Provide homeowners with the funds to renovate or repair their properties.
- Loan guarantees: Provide affordable mortgage interest rates through approved local lenders, even without a down payment.
- Direct loans: Offer mortgages to applicants with low and very low incomes.
Your eligibility for a USDA loan may differ depending on the county where you reside. For instance, Kent County residents may be eligible for a single-family housing loan with a maximum limit of $473,800.
VA home loans are a good option for veterans and qualified individuals to finance homes. Some benefits include low interest rates, no down payment and no need for private mortgage insurance.
The VA offers several types of loans, including:
- Purchase loans and cash-out refinance loans: Available for your house or a that of spouse or dependent (for active duty service members). To qualify, you must have good credit, enough monthly income and a valid Certificate of Eligibility (COE).
- Interest Rate Reduction Refinance Loan (IRRRL): Requires you to have a VA loan on the home. IRRRL lowers the interest and monthly payment on a VA-guaranteed loan.
- Native American Direct Loan (NADL) Program: Assists Native American veterans in buying, building, improving or refinancing a home on Native American land.
- Specially Adapted Homes (SAH) or Special Housing Adaptation (SHA) grants: Help veterans with total and permanent service-related disabilities find adequate housing.
Low-Down-Payment Loan Programs
You can buy a house with less than a 20% down payment if you qualify for a low down payment loan, such as conventional loans and FHA loans.
Fannie and Freddie (Conventional) Loans
Conventional loans are the most common loan type and are not part of a government initiative. While they can be more challenging to obtain, conventional loans are often more affordable than FHA loans. However, they also come with stricter lending requirements, such as a high credit score and low debt-to-income ratio.
Traditional loans fall into two primary groups:
- Conforming Loans: The government sets maximum loan levels for conforming loans. Fannie Mae or Freddie Mac, the organizations that back conforming loans, establish the guidelines.
- Non-conforming loans: These loans exceed conforming loan limits. Eligibility, costs and coverage might differ significantly between private lenders, so it's crucial to shop around and evaluate several offers.
In most counties, conforming loan amounts must be $647,200 or less. If your down payment is less than 20%, you'll also need to purchase mortgage insurance.
Some lenders also provide non-conforming loans for borrowers with unique circumstances, such as self-employed borrowers or those with poor credit.
FHA loans are private loans backed by the government, offered in 15- and 30-year fixed terms. They provide more flexible options for borrowers with poor credit scores who don't qualify for conventional mortgages, helping them become homeowners much faster.
However, keep in mind that most FHA loans with less than 20% down payments require buyers to purchase mortgage insurance, consisting of an upfront and annual mortgage insurance fee. This can increase the long-term costs of an FHA loan.
Depending on your credit score, your down payment amount may vary. For instance, individuals with a credit score of 500 to 579 will need to pay a minimum 10% down payment, while those with 580 or higher will only need to make a 3.5% down payment.
You can calculate the maximum FHA loan amount you qualify for using The Department of Housing and Urban Development’s online tool.
Homebuyers interested in purchasing a fixer-upper can consider An FHA 203(k) loan. You can use these loans to finance a home's purchase and any needed renovations under a single mortgage. The FHA 203(k) loan may have more flexible qualification terms than a conventional mortgage since the government backs it.
Keep in mind that contractors, not borrowers, must complete any repairs and renovations. FHA 203(k) work must also begin within 30 days of closing and be finished within six months.
Borrowers can use FHA 203(k) funds to install or fix flooring and roofing, increase the home's energy efficiency, modernize plumbing, address any health or safety risks, create accessibility and many other improvements.
Homebuyers or homeowners must meet specific criteria to qualify for an FHA 203(k) loan, such as a minimum credit score of 500, a suitable debt-to-income ratio and the ability to make a down payment. These requirements are similar to those for a typical FHA loan.
USDA loans: Your adjusted household income should be under 115% of the median income in your area to qualify.
VA loans: VA loan applicants typically require a Certificate of Eligibility (COE).
Conventional loans: The loan amount must be $647,200 or less for conforming loans, depending on where you live.
FHA loans: FHA loans are a good fit for applicants with low credit scores and limited savings.
FHA 203(k) loans: FHA 203(k) loans can cover the cost of home repairs and upgrades, as well as the price of a home.
Rhode Island Homebuyer Programs
In addition to federal loans, state-specific Rhode Island first-time homebuyer programs can help you purchase a home.
Down Payment and Closing Cost Assistance Program
The Housing Network of Rhode Island offers up to $20,000 in down payment and closing cost assistance to income-eligible homeowners. Applicants must contribute at least $1,500 of their own funds to be considered for this program.
RIHousing First-Time Homebuyer Loan
This loan enables you to finance 100% of your home for up to a maximum purchase price of $546,752 when combined with down payment assistance.
RIHousing Extra Assistance Program
The RIHousing Extra Assistance Program assists eligible first-time homeowners with their down payment, which can be the biggest barrier to homeownership. It funds up to 6% of the purchase price of your home or $15,000, whichever is lower.
FAQs for First-Time Homebuyer Programs in Rhode Island
MoneyGeek has answered common questions first-time homebuyers in Rhode Island ask.
- Consumer Financial Protection Bureau. "Conventional loans." Accessed September 24, 2022.
- Federal Deposit Insurance Corporation. "203(b) Mortgage Insurance Program." Accessed September 24, 2022.
- Housing Network of Rhode Island. "Down Payment and Closing Cost Assistance Program." Accessed September 24, 2022.
- U.S. Department of Housing and Urban Development. "Loans." Accessed September 24, 2022.
- U.S. Department of Housing and Urban Development. "The Section 203(k) Loan Program." Accessed September 25, 2022.
- RIHousing. "Extra Assistance Loan." Accessed September 25, 2022.
- RIHousing. "First-time Homebuyer Loan." Accessed September 25, 2022.
- United States Department of Agriculture. "Rural Development Single Family Housing - Area Loan Limits." Accessed September 25, 2022.
- United States Department of Agriculture. "Single Family Housing Guaranteed Loan Program." Accessed September 25, 2022.
- U.S. Department of Veteran Affairs. "VA Home Loans." Accessed September 25, 2022.