Tony Anderson/GettyImages; Illustration by Hunter Newton/Bankrate
Key takeaways
- HFA loans are mortgages available solely through state housing finance agencies (HFAs).
- Geared toward first-time and low- to moderate-income homebuyers, HFA loans feature low down payments, competitive interest rates and down payment and closing cost assistance.
- HFA loans typically impose income and purchase price limits on borrowers. These limits vary by HFA.
What is an HFA loan?
An HFA loan is a type of conventional mortgage offered through state housing finance agencies (HFAs). HFA loans help make homeownership more affordable for first-time homebuyers and low- to moderate-income borrowers, thanks to their low down payment requirements and down payment assistance options.
Every state has an HFA that supports affordable housing initiatives. While their exact functions and relationship to their state governments varies, HFAs typically act as independent organizations, overseen by a board of directors appointed by the state’s governor. They might be referred to as the state’s housing “authority,” “commission,” “corporation” or “department.”
How does an HFA mortgage loan work?
HFA loans are a partnership between state HFAs, private lenders, and Fannie Mae and Freddie Mac, the two government-sponsored enterprises (GSEs) that back much of the mortgage market in the U.S. Essentially, Fannie and Freddie design the loans and their terms, and HFAs connect their clients to approved, private lenders, who originate and fund the loans.
Once you’re approved, you can often finance the down payment and closing costs with assistance provided by the HFA. The assistance could be a second mortgage, a forgivable loan, or even an outright grant. Often, this assistance is available only if your primary mortgage is an HFA loan.
HFA loan requirements
HFA loans come with many requirements. To qualify for an HFA loan, you must typically:
- Be a first-time homebuyer. This means you haven’t owned a home within the last three years.
- Plan to live in the home you’re buying. At least one borrower must use the home as a primary residence.
- Buy a home within a certain area. The home you want to buy must be within the area covered by the HFA offering assistance.
- Meet down payment, credit score and debt-to-income (DTI) ratio thresholds. HFAs often require borrowers to have a credit score of at least 620 and a DTI ratio of no more than 45 percent. Many HFA loans also require down payments around 3 percent, but this can usually be covered or offset with assistance.
- Meet certain income and purchase price requirements. Typically, both your income and the cost of the home you’re buying must be below a certain dollar amount.
- Take a state-mandated class. Homebuyer education courses are designed to prepare you for the homebuying process, and many are offered online.
Types of HFA loans
There are two types of HFA loans: Fannie Mae’s, called HFA Preferred, and Freddie Mac’s, known as HFA Advantage. Some states offer both HFA Preferred and HFA Advantage loans; some offer one type exclusively. Here’s how the two types compare.
| Fannie Mae’s HFA Preferred | Freddie Mac’s HFA Advantage | |
|---|---|---|
| Loan type | Conventional | Conventional |
| Rate type | Fixed rate | Fixed rate |
| Minimum down payment | 3 percent | 3 percent |
| Distinct features | These loans also allow for limited cash-out refinancing | People who do not plan to live in the home can serve as co-borrowers |
What’s the difference between HFA vs. FHA mortgage loans?
An HFA loan and an FHA loan might sound the same — and have similar characteristics, like a low down payment — but they’re two separate types of mortgages. Let’s dive into some of the similarities and differences.
| HFA loans | FHA loans | |
|---|---|---|
| Sponsoring entity | State housing finance agencies (HFAs) | Federal Housing Administration (FHA) |
| Available from | State-approved lenders | Banks, credit unions, mortgage companies and other businesses that offer mortgages |
| Minimum down payment | 3 percent | 3.5 percent |
| Minimum credit score | 620 | As low as 500 |
| Income and purchase price limits | Often imposed | No income limits, but are subject to FHA loan limits, which are typically higher than the limits for HFA loans |
| Mortgage insurance | Often yes, but as with other conventional loans, private mortgage insurance (PMI) is cancelable once you have built up 20 percent equity in your home | Mortgage insurance premiums (MIP) required; may be permanent or cancelable, depending on the down payment size |
HFA loan pros and cons
Before you get an HFA loan, consider the benefits and drawbacks:
Pros of HFA loans
- Low down payment requirement and closing costs: HFA loans tend to require relatively low down payments and upfront fees.
- Financial assistance: Many HFAs offer assistance with closing costs or down payments.
- Lower mortgage insurance costs: HFA loans may have lower mortgage insurance costs than conventional loans, and some don’t charge for it at all.
Cons of HFA loans
- Not widely available: You can only get an HFA loan from your state housing agency. Other types of loans are more widely available.
- Income limits: HFA loans are for people with incomes lower than the median of their geographic area.
- Inconsistent rules: Each HFA can set different rules and requirements, and some have more stringent requirements than others.
- Higher credit score requirements: While HFA loans have relatively low minimum credit score requirements, these requirements are typically still higher than for some alternatives, like FHA loans.
Who is an HFA loan best for?
An HFA loan might be a good fit if you fall into at least one of these categories:
- First-time buyers. Remember, this includes buyers who haven’t owned a home in the past three years.
- Those with low or moderate incomes. To qualify, your income must fall within the HFA’s income limits, which are typically set yearly and vary from state to state — and even between counties within the state.
- Owner-occupants. HFAs are available for principal residences, not investment properties or vacation homes.
- House hackers. HFA loans may allow the purchase of two- to four-unit residences, meaning you could finance a duplex, divided townhouse or small apartment building. You’d just need to occupy one unit and rent out the rest, a strategy sometimes known as “house hacking.”
How to apply for an HFA loan
- Explore your HFA’s options. You can find your HFA’s website through our guide to first-time homebuyer programs by state. Each one has its own requirements for HFA loans, as well as its own assistance options.
- Contact the state housing authority. Depending on the HFA, you can either request a call via an online form or call the agency directly.
- Find an approved mortgage lender. HFA loans are offered only through lending partners approved by your HFA. You can find a list of these lenders on your HFA’s website.
- Compare lender reviews and testimonials. Some HFAs have 50 or more lending partners, so you’ll want to narrow down your options.
- Take a homebuyer course. These are typically required to qualify for an HFA loan. Your HFA’s website will offer a list of approved courses.
- Apply for a mortgage. After you’ve created a shortlist, you can move forward with a preapproval and application. When you apply for an HFA loan, be prepared to provide all of your financial information, including paystubs and tax returns.
Other low-down-payment mortgages
Whether you’re a first-time or repeat homebuyer, there are several other low-down-payment mortgage options. Some of the most popular include:
- FHA loans: More widely available than HFA loans. If you have a credit score of at least 580, you can qualify to put down as little as 3.5 percent.
- VA loans: Only available to veterans, service members and surviving spouses. Typically no down payment requirement.
- USDA loans: Only available to buyers in specific, rural areas with low and moderate incomes. No down payment requirement.
- HomeReady/Home Possible loans: 3-5 percent down payment required. Lower mortgage insurance costs. Available to buyers making 80 percent or less of the local area median income.
- Conventional 97 loan: Conventional mortgage with 3 percent down payment requirement.
FAQ
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HFA mortgage rates can vary with market rates and between HFAs. They tend to be quite competitive with national average rates. To find up-to-date rates, contact your state’s HFA.
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Yes, you can use down payment assistance when applying for an HFA mortgage. Your HFA may be able to help you find assistance or offer it directly.
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Yes, most HFA mortgages require mortgage insurance payments. You can stop making these payments once you reach an 80 percent loan-to-value (LTV) ratio or 20 percent home equity.
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Yes, it is possible to refinance to an HFA loan. Depending on the type of HFA loan you have, you may or may not be able to take cash out during closing.
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