Key takeaways

  • 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.

No, “HFA loan” is not a misidentification of 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. 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?

HFA loans are conventional mortgages, issued by private lenders, which must conform to guidelines set by Fannie Mae and Freddie Mac.

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.”

Fannie Mae and Freddie Mac are two government-sponsored enterprises (GSEs) that back much of the mortgage market in the U.S. They 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.

How does an HFA loan work?

HFA loans come with many caveats. You have to meet your state program’s requirements for income and homeownership status (you typically can’t have owned a house within the past three years.) And you’ll probably need to take a homebuyer education course designed to prepare you for the homebuying process.

Once you’re approved, you can often finance the 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 percent for single-family homes
  • Credit score: at least 620
  • Debt-to-income ratio: 45 percent
  • Occupancy requirement: At least one borrower must use the home as a primary residence

Your local HFA may have extra 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

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

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 percent. 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) ratio. 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?

Getting an HFA loan might be a better idea for certain people. Consider an HFA loan if you fall into at least one of these categories:

  • First-time buyers. The definition is broad enough to include first-time homeowners and buyers who haven’t owned a home in the past three years.
  • Those with 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 counties within the state. Those with high incomes should look elsewhere.
  • Owner-occupants. HFAs aren’t available for investment properties or vacation homes. Rather, they’re for principal residences.
  • House hackers. HFA loans do allow purchases 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

  1. 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.
  2. 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.
  3. 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.
  4. 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

  • HFA mortgage rates can vary with market rates and 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.
  • 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 an 80 percent LTV ratio 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.