Guide to HFA loans: What is an HFA loan and who qualifies?

What is an HFA loan?

HFA stands for “Housing Finance Agency” or “Housing Finance Authority.” This refers to each state’s agency that provides advice — and sometimes financial assistance — to home buyers.

Via the HFA loan program, qualified buyers might be in line for a 3-percent-down mortgage and even down payment assistance.

In some cases, you don’t have to be a first-time home buyer. But you will need a low-to-moderate income for the area where you’re buying.

If you’re interested in an affordable HFA home loan, here’s what you should know.

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How the HFA loan program works

HFA loan programs are a partnership between state Housing Authorities and Fannie Mae and Freddie Mac — the agencies that regulate most U.S. mortgages.

HFA loans are meant to make home buying more affordable for those with low-to-moderate incomes. They can offer lower upfront closing costs and lower monthly payments than standard mortgage programs.

Note that it’s easy to confuse the HFA loan with the FHA loan. But they’re very different. (And to make matters more confusing, there’s even an FHA HFA loan program.) If you’re interested in the Federal Housing Administration’s FHA loan program, you can find more information on it here.

HFA loan benefits

HFA home loans are attractive for those who are eligible. You can:

• Make a down payment as low as 3% of the purchase price
• Apply for down payment assistance in the form of a loan or grant
• Pay lower monthly mortgage insurance premiums compared to some other loans
• Cancel private mortgage insurance (PMI) after a few years, unlike with the FHA program

You will probably have to borrow from a lender on your HFA’s approved list. But you’ll generally get a wide choice. So you can still shop around for your best deal.

Meanwhile, either the HFA or your chosen lender should hold your hand throughout the entire process. So, if obstacles arise, they should do their best to help you clear them.

The HFA loan program can make home buying more affordable and more approachable for first-time home buyers who qualify.

HFA Advantage and HFA Preferred loan programs

Fannie Mae and Freddie Mac each have their own HFA loan option. Fannie calls its product the HFA Preferred mortgage. And Freddie calls its program the HFA Advantage mortgage.

For most borrowers, the two programs are virtually identical.

But, if you have specific needs, there are key differences. Most obviously, Freddie says these loans can only be used to buy a single-family home. Fannie says it allows people to buy 2- to 4-unit homes, though you have to live in one of the units.

Similarly, Fannie says it offers “limited cash-out refinances” while Freddie won’t let you take out any cash at closings.

Overall, you’re more likely to be tripped up by your HFA’s rules than Fannie or Freddie’s. But you’ll want to explain your goals to your HFA contact and ask them to guide you through your choice of home loan.

Who qualifies for an HFA loan?

Because each housing finance agency makes its own rules, we can’t give you information that will apply everywhere. But here are some general underwriting guidelines you might see when looking at HFA loan programs.

1. Can be a first-time home buyer or repeat buyer who has not owned a home in the past three years (varies by state)
2. Buyer’s salary must conform to household income limits (varies by state or county)
3. Buyer must meet a minimum credit score and other financial guidelines

Here’s a little more detail about each requirement.

1. First-time and repeat buyers may be allowed

Some housing assistance programs are specifically geared toward first-time home buyers. But that’s not always true for HFA loans.

For example, we picked a state at random (Connecticut) and visited its webpage for HFA loans. And the Connecticut Housing Finance Authority (CHFA) says, “You must be a first-time homebuyer or have not owned a home in the past three years.”

But Fannie and Freddie don’t have that rule. And Fannie says, “No first-time homebuyer requirement (You could be eligible even if you’ve purchased homes in the past.)”

So each HFA can apply its own rules over and above Fannie and Freddie’s. You’ll need to check with the one in your state or area to see its offerings and restrictions.

2. Income limits apply

HFA loans are intended to help those with low-to-moderate incomes. So you probably won’t get them if you’re a high flyer at work. But, as Freddie says, “HFAs establish their own income limits.”

In our randomly chosen state of Connecticut, the HFA says that your gross income must not be greater than 80% of the area median income (AMI). Luckily, it provides a map that shows both income and sales price limits for each town, city, and county. If you’re buying within that state, you simply have to click on the place where you want to buy to receive the information you need.

It’s likely your state’s HFA will have a similar map or some other lookup tool that will provide the same information. If you can’t find one, call the office. They’re there to help.

And your state may be more generous than a limit of 80% of the AMI. So check.

3. Other borrower requirements

You’ll likely have to meet Fannie and Freddie’s standard credit score requirements. The agencies require a minimum FICO score of 620.

And lenders will want to be sure you can comfortably afford the monthly payments. So they will check to see that you don’t have to spend too great a portion of your monthly income on debt payments and other inescapable financial obligations, such as child support or alimony.

This is called your debt-to-income ratio (DTI). You can learn more and discover how to calculate your DTI here.

Most HFA programs do not allow investment or rental properties. This means the home that you’re intending to purchase must be your primary residence.

With some loans, you also need to show that you have savings or easily accessible reserves — an emergency fund. Freddie says, “No reserves required” for its HFA loans, but again, individual lenders can set their own requirements.

“Typically, in addition to lender approval, your loan also needs to be reviewed by HFA as well,” says Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

Finally, a homebuyer education course may be required to qualify. These classes are often free and offered online.

Eligible property types

If your HFA allows it, you can use these loans to buy a home or refinance your existing one. But no cash-out refinances are allowed by Freddie and only limited ones by Fannie.

• Single-family homes and townhouses (HFA Advantage)
• 2-4 unit homes (HFA Preferred)
• Fannie Mae or Freddie Mac eligible condos
• Planned Unit Developments (PUD)

As long as your HFA’s rules permit, you can buy a single-family or multifamily dwelling with up to four units using the HFA Preferred program from Fannie Mae. But the Freddie Mac HFA Advantage loan only allows one-unit properties.

Eligible property types may include single-family homes, condominiums, Planned Unit Developments (PUDs), and qualified manufactured homes.

Both organizations require you to be purchasing your main residence. So you can’t buy an investment property or vacation home.

Pros and cons of HFA loans

Here are the major benefits and drawbacks you’ll want to keep in mind when considering an HFA loan program versus other low-down-payment loans.

Pros of an HFA loan

For the right homebuyer, the pros are very attractive:

• Low minimum down payment of 3%
• Chance of getting financial assistance from your HFA to help with the down payment and potentially closing costs
• Lower monthly mortgage insurance payments compared to some other low-down-payment loans
• Stop paying for mortgage insurance when your equity* reaches 20% of the home’s value — Unlike FHA loans, with which you have to pay it until you refinance, move, or pay off your loan. Another way to say this is that you’ll pay mortgage insurance until your loan-to-value ratio (LTV) is at 80% or lower

That adds up to a great package for qualified home buyers.

*Home equity is the amount by which your home’s market value exceeds your mortgage balance. With a conventional loan — including the HFA Preferred and HFA Advantage program — you can cancel mortgage insurance once your equity reaches 20%. For instance, if your home’s value is $200,000 and your loan amount is $160,000, you may be eligible to cancel PMI and reduce your mortgage payments.

Cons of an HFA loan

The cons mean an HFA mortgage isn’t the right home loan for everyone:

• Inconsistency across the country: Your local HFA’s rules may be different than Fannie and Freddie’s. So you have to dig to discover whether you’re eligible and for what
• DPA amounts vary: Some states and areas are more generous than others when it comes to the down payment assistance on offer
• You need a moderate or low income: If you have a high salary, you’ll need another sort of mortgage
• You need a credit score of at least 620: FHA loans require only 580 with 3.5% down
• You need to pick the right loan: For most borrowers, Fannie and Freddie’s loan products are virtually the same. But one may trip you up on a minor point while the other lets you move forward. Your HFA should help you choose

Many borrowers won’t be at all troubled by these. But you should be aware of them.

How to apply for an HFA loan

To get started, find your state’s HFA in this directory, click the link to its website and have a read. Then call for more information and guidance.

If the person you speak to thinks your application can succeed, they will send you the necessary forms. And your HFA should continue to hold your hand throughout — or at least until a lender takes over helping you.

Note, too, that some cities and counties have their own HFAs. So be sure to check out all your options.

What down payment assistance programs are available?

Some HFA programs offer low-interest loans to cover some or all of the down payment, which you pay down in parallel with your main mortgage.

Others offer forgivable loans, meaning you don’t make payments and the loan disappears after you’ve lived in the home for a specified number of years.

Still others offer outright grants: effectively gift money that never has to be repaid.

Yet again, each HFA sets its own rules for the down payment assistance it offers. So what you might get and whether you’re eligible will depend on your state or area’s generosity.

An example from Florida

While researching this article, we happened upon Florida’s offering (PDF). It lets those who are eligible choose from three down payment assistance programs:

1. Florida Assist Loan Program: Borrow up to $7,500 at 0% interest. You don’t pay a cent until you move, sell, or refinance*. But then you have to pay it all back
2. HFA PLUS second mortgage: Helps with closing costs as well as down payments. This is a five-year loan at 0% interest. You make no monthly payments and 20% is forgiven each year. So, after five years, you owe nothing. It’s a gift!
3. Homeownership loan program: You borrow up to $15,000 at 3% interest over 15 years. You pay it down monthly. But if you move, sell or refinance* during that time, the remaining balance must be paid in full

*Florida’s document is more specific and loans become payable when you “sell, refinance, transfer deed, payoff the first mortgage or no longer occupy the property as [your] primary residence.”

Note that DPA programs are subject to change, and the offerings above may be different by the time you read this. Check with a local mortgage lender about what’s available when you apply.

Other down payment options

If your HFA’s down payment assistance program (DPA) can’t or won’t provide the help you need, ask about other DPAs operating in your state.

There are thousands of assistance programs across the country, most of which are not HFAs. So it’s worth checking if there’s another local option that’s more inclusive and generous.

But, of course, if you don’t get assistance from your HFA, you’re unlikely to be in line for an HFA loan.

Instead, check out Fannie’s HomeReady and Freddie’s Home Possible mortgages. These have similar rules and allow 3% down.

Oh, and there’s another bonus. One academic study found: “Descriptive evidence indicates that these state-subsidized programs help financially vulnerable households enter homeownership and retain their homes at higher rates than lower-income households purchasing homes in the private market.”

HFA loans vs. other conventional loans

HFA loans aren’t the only conventional mortgages to offer low down payments and special features.

Fannie and Freddie have others, including the ones we mentioned earlier: HomeReady and Home Possible. Down payment assistance can be used with those loans, too.

So why go for an HFA loan? Well, there could be three main reasons:

1. It may be easier if your income is below average, because pretty much everyone in the program will be in the same boat. So lenders could make it easier for you to qualify
2. With some HFAs, getting a loan through them might earn you some privileges when it comes to down payment assistance. You might even find yourself at the front of the line
3. Especially if you’re a first-time homebuyer, you may value having someone knowledgeable at the HFA on your side. And it’s reassuring to know you can call for help or advice at any time

So there could be tangible benefits to the knowledge and assistance that come with the HFA program.

Still, if you don’t qualify, Fannie and Freddie’s other 3-percent-down loans are great options.

HFA vs. FHA mortgages

We mentioned at the top how easy it is to confuse FHA loans with HFA ones. But they’re very different. Here’s why.

FHA loan

FHA loans are mortgages backed by the Federal Housing Administration, an arm of the Department of Housing and Urban Development (HUD).

Unlike the HFA program, FHA loans are widely available from just about any mainstream lender.

Key characteristics of FHA loans compared to HFA loans are:

• Higher down payment: minimum 3.5% of purchase price
• Lower minimum credit score: 580
• No easy way out of mortgage insurance: You typically have to pay premiums monthly until you refinance, sell, or zero your loan balance
• No first-time buyer requirements: The same as Fannie and Freddie. But your HFA may have different rules

These are popular mortgages.

The monthly mortgage insurance premiums (MIP) cost is the main drawback for many potential buyers. However, it’s possible to drop your FHA mortgage insurance by refinancing to a conventional loan once you have 20% equity — so don’t think you’re stuck with MIP forever.

HFA loan

Key characteristics of the HFA loan program compared with FHA loans are:

• Lower down payment: minimum of 3% of purchase price
• Higher minimum credit score: 620
• Sure exit from mortgage insurance: Stop paying as soon as your mortgage balance drops to 80% of your home’s market value

These are attractive benefits. However, HFA loans are less common than FHA. You can easily apply for an FHA mortgage with just about any lender, and there are no extra steps (such as working with a local HFA representative).

Thanks to their availability and lenient requirements, FHA loans are popular among first-time buyers looking to get a foot in the door.

HFA loan FAQ

Today’s HFA mortgage rates

Current mortgage rates are still historically low and HFA rates are generally among the best. Compare rates from HFA-approved lenders to find the most affordable loan.