Although commonly confused with an FHA loan, an HFA loan is a different type of mortgage offered through a partnership between Fannie Mae, Freddie Mac and state housing finance agencies (HFAs). Here are the basics to know.
What is an HFA loan?
HFA loans are designed to make homeownership more affordable for first-time homebuyers or borrowers with lower or moderate incomes. With an HFA loan, you could have lower monthly mortgage payments that better fit your budget, and receive closing cost and down payment assistance to help with the upfront cost of buying a home.
While their exact function and relationship to their state government vary, housing finance agencies support affordable housing initiatives, including helping homebuyers and renters. 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,” but essentially serve the same purpose: to address housing and community development needs in the state.
How HFA loans work
Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that back much of the mortgage market in the U.S., each offer an HFA loan option. With Fannie Mae, it’s called the “HFA Preferred” mortgage program. With Freddie Mac, you’ll encounter “HFA Advantage.”
Fannie Mae and Freddie Mac work with HFAs around the country to offer these loans through a selection of approved mortgage lenders. The HFA itself doesn’t fund them.
Both the HFA Preferred and HFA Advantage options are conventional, fixed-rate loans with a minimum down payment of 3 percent, and are able to be combined with down payment assistance through an HFA. The down payment assistance could be financed as a second mortgage or a forgivable loan, or could be a grant that doesn’t need to be repaid, depending on what your HFA offers.
Although these loans are ideal for first-time homebuyers, they are available to borrowers at all stages. If you’re a first-time buyer — or you haven’t owned a home in the past three years — you’ll be required to take a homebuyer education course to qualify.
If you put down less than 20 percent with an HFA loan, you’ll also be required to pay for mortgage insurance. As with other conventional loans, this can be cancelled when you pay down your mortgage to 80 percent of your home’s value, but with an HFA loan, there are also reduced insurance coverage options — based on your income and loan-to-value ratio — that can help you save.
Aside from buying a home, HFA loans can also be used to refinance. The HFA Preferred option allows for limited cash-out refinancing, but the HFA Advantage program does not.
Who is eligible for an HFA loan?
You could be eligible for an HFA loan whether you’re a first-time or repeat homebuyer. However, depending on your state, it might only be available to repeat buyers if the buyer is purchasing a home in a designated “targeted area.”
To qualify, your income needs to fall within the HFA’s income limits, which are typically set yearly and vary from state to state. You’ll also need to be obtaining the loan for your primary residence that you intend to live in, not for an investment or second home. An HFA Advantage loan is only usable for a one-unit property (such as a single-family home or condo); an HFA Preferred loan can be for a property with up to four units.
Other eligibility requirements, like the minimum credit score and maximum debt-to-income ratio, are determined by the HFA and the lender the HFA works with. So you’ll need to get in touch with the HFA to learn whether you meet them. Fannie Mae and Freddie Mac generally require a credit score of at least 620, so consider that a baseline.
What are HFA loan rates?
HFA loan rates vary based on the HFA and lender, but can sometimes be more competitive than market rates for other types of loans. You can compare HFA loan rates with mortgage rates on Bankrate.
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 Bankrate’s guide to first-time homebuyer programs by state.
- Contact the HFA. 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 hand over 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 low-down payment mortgage options. Some of the most popular include FHA loans, which ask for 3.5 percent down, as well as VA loans and USDA loans, which have no down payment requirement at all.
Fannie Mae and Freddie Mac also offer HomeReady and Home Possible loans, respectively, as well as the Conventional 97 loan, all with just a 3 percent down payment requirement. Depending on your eligibility, these might be viable alternatives to an HFA loan.