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- HFA loans are mortgages available solely through state housing finance agencies.
- 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 terms and qualifications vary by state, which may impose income and purchase price limits on borrowers.
If you see the term “HFA loan” — no, it’s not a typo for the better-known FHA loan. It’s a wholly different type of mortgage, offered through state housing finance agencies (HFAs) in partnership with major loan providers Fannie Mae and Freddie Mac.
But like FHA loans, HFA loans help make homeownership more affordable for first-time homebuyers and low- to moderate-income borrowers, thanks to their reduced interest rates and closing costs, as well as their down payment assistance options.
What is an HFA loan?
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that back much of the mortgage market in the U.S., work with state housing authorities (HFAs) nationwide to offer these loans. Fannie and Freddie design the loans and their terms, but neither they nor the state directly funds them or deals directly with applicants. Instead, they work through a selection of approved, private mortgage lenders.
HFAs support affordable housing initiatives, including helping homebuyers, homeowners and renters. While their exact function and relationship to their state government 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.”
Both GSEs offer an HFA mortgage product. With Fannie Mae, it’s called the “HFA Preferred”; Freddie Mac’s version is dubbed “HFA Advantage.” Both are fixed-rate mortgages with a minimum down payment of 3 percent.
You can often finance that down payment with down payment assistance, which is provided through the HFA. The assistance could be in the shape of a second mortgage (with very generous terms), a forgivable loan (that doesn’t need to be repaid in full or in part if you meet certain conditions), or even an outright grant (like HFA Preferred grants), depending on what that particular state authority offers. Often this assistance is only available if you are financing with an HFA loan.
HFA loan requirements
To qualify for one of these mortgages, you generally must meet a few basic HFA loan requirements:
- Down payment: 3% for single-family homes
- Credit score: at least 620
- Debt-to-income ratio: 45%
- Occupancy requirement: At least one borrower must use the home as a primary residence
Your local HFA may have additional minimums you must meet. Often you need to be within certain income and purchase price limits that vary by county/municipality and household size. And of course, you have to be buying the home within the state.
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 opt to go with one type exclusively. Here’s how the two types compare.
|Fannie Mae’s HFA Preferred||Freddie Mac’s HFA Advantage|
|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|
HFA vs. FHA mortgage loans
An HFA loan and FHA loan might sound the same — and have similar characteristics, like a low down payment — but they are 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||580|
|Income and purchase price limits||Often imposed||Not often imposed|
|Mortgage insurance||Yes, but like with other conventional loans, private mortgage insurance (PMI) is cancellable once you have built up 20 percent equity in your home||Mortgage insurance premiums (MIP) required; may be permanent or cancellable, depending on the down payment size|
HFA loan pros and cons
An HFA mortgage has its pros and cons to consider before deciding if it’s the best choice for you:
Pros of HFA loans
- Low down payment requirement and closing costs: With an HFA loan, you can put down as little as 3%. Closing and upfront fees tend to be low.
- Financial assistance: Many HFAs offer assistance with closing costs or down payments.
- Lower mortgage insurance costs/easier insurance elimination: HFA loans charge less for mortgage insurance and eliminate insurance payments automatically upon reaching 80 percent loan-to-value (LTV). Other programs, like FHA loans, make it harder — if not impossible — to get out of mortgage insurance, as long as the loan is active.
Cons of HFA loans
- Not widely available: You can only get an HFA loan from your local state 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, so you need to check with your specific HFA to learn if you’re eligible.
- Higher credit score requirements: Though low, HFA loans have higher credit score minimums than some alternatives like FHA loans.
Who is an HFA loan best for?
HFA loans are best for first-time buyers or people who haven’t owned a home in the past three years. If you’re a first-time buyer, you’ll probably need to take a homebuyer education course to qualify.
It also helps to be of modest means. To qualify, your income needs to fall within the HFA’s income limits, which are typically set yearly and vary from state to state — and even counties within the state. Those with high incomes should look elsewhere.
The same is true if you’re hoping to buy a purely investment property or a vacation home rather than a principal residence. HFA loans are intended for those buying homes to live in full time. However, they do allow purchases of two-to-four unit residences, meaning you could finance a duplex, divided townhouse or small apartment building — occupying one unit and renting out the rest.
How to apply for an HFA loan
- Explore your HFA’s options. Each HFA has its own requirements for HFA loans, and could also offer alternative programs and assistance. You can find your HFA’s website through our guide to first-time homebuyer programs by state.
- Contact the state housing authority. Depending on the HFA, you can either fill out a form online to get in touch for more information, or call the agency directly.
- Find an approved mortgage lender. HFA loans are only offered 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 to help narrow your options. From there, you can move forward with a preapproval and application, and a homebuyer course, if needed. 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. Lower credit score requirements. 3.5 percent down payment requirement.
- VA loans: Only available to veterans and service members. No down payment requirement.
- USDA loans: Only available in specific areas. No down payment requirement.
- HomeReady/Home Possible loans: 3-5 percent down payment required. Lower mortgage insurance costs. Income limit of 80 percent of the local area median income.
- Conventional 97 loan: Conventional mortgage with 3 percent down payment requirement.
HFA loan FAQ
Yes, HFA loans are conventional mortgages, issued by private lenders, which must conform to guidelines set by Fannie Mae and Freddie Mac.
Yes, you can use down payment assistance when applying for an HFA mortgage. Your HFA may be able to help you find assistance.
Yes, HFA mortgages require mortgage insurance payments. You can get out of these payments once you reach 80 percent LTV, or 20 percent home equity.
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.
HFA mortgage rates can vary with market rates and depending on the HFA you work with. They tend to be quite competitive with national average rates. To find up-to-date rates, contact your state’s HFA.