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What is an HFA loan?
HFA loans are a type of traditional mortgage offered through state housing finance agencies (HFAs). HFA loans can help make homeownership more affordable for first-time home buyers and low-income borrowers thanks to the low down payment requirements and down payment support options.
All states have HFAs that support affordable housing initiatives. Although their exact function and relationships with state governments vary, HFAs usually function as an independent organisation supervised by a board appointed by the governor. They may be referred to as state housing “authorities”, “committees”, “companies” or “divisions”.
How does an HFA mortgage work?
HFA Loans are a partnership between the state HFA, Private Lender, and Fannie Mae and Freddie Mac, two government-sponsored by two governments (GSEs) that support the majority of the US mortgage market, with Fannie and Freddie designing the loan and its terms, and HFA approving approved lenders, private lenders and loan funds.
Once approved, they often can fund down payments and closure costs with the assistance provided by the HFA. Support can be a second mortgage, a permitted loan, or even a full grant. In many cases, this assistance is only available if your primary mortgage is an HFA loan.
HFA Loan Requirements
HFA loans have many requirements. To qualify for an HFA loan, you will usually:
- Become your first home buyer. This means that you have not owned a home within the last three years.
- Plan to live in the house you are buying. At least one borrower should use the home as a primary residence.
- Buy a home within a specific area. The home you want to buy must be within the area that provides HFA support.
- Meets the down payment, credit score, and debt income (DTI) ratio thresholds. HFAS often require borrowers to have a credit score of at least 620 and a DTI ratio of less than 45%. Many HFA loans require a lower payment of around 3%, which can usually be covered or offset with assistance.
- Meet specific income and purchase price requirements. Usually, both your income and the cost of the home you purchase should be below certain dollars.
- I will take a national class. The HomeBuyer Education course is designed to prepare you for the home buying process, and many are offered online.
Types of HFA Loans
There are two types of HFA loans: the Fannie Mae, known as HFA Preferred, and the Freddie Mac, known as HFA Advantage. Some states offer both HFA Priority Loans and HFA Advantage Loans. Some offer exclusively some types. Here’s how to compare the two types:
| Fannie May’s HFA is desirable | Freddie Mac’s HFA advantage | |
|---|---|---|
| Loan type | Traditional | Traditional |
| Rate type | Fixed rate | Fixed rate |
| Minimum down payment | 3% | 3% |
| Clear features | These loans can also have limited cash-out refinances | Those who don’t plan to live in the house can serve as collaborators |
What is the difference between HFA and FHA mortgage loans?
HFA and FHA loans may sound the same – and although they have similar characteristics, like a lower down payment, they are two separate mortgages. Let’s dive into some similarities and differences.
| HFA Loan | FHA loan | |
|---|---|---|
| Sponsored Entities | State Housing Financial Institutions (HFA) | Federal Housing Administration (FHA) |
| Available from | State-approved lenders | Banks, credit unions, mortgage companies and other companies offering mortgages |
| Minimum down payment | 3% | 3.5% |
| Minimum credit score | 620 | As low as 500 |
| Income and purchase price limit | It is often imposed | There is no income limit, but it is subject to FHA loan restrictions. This is usually higher than the limit on HFA loans |
| Mortgage insurance | In many cases, yes, but like other traditional loans, if you build up 20% capital in your home, your private mortgage insurance (PMI) will be cancelled |
Mortgage insurance (MIP) is required. Depending on the size of your down payment, it may be permanent or cancelled |
Pros and cons of HFA loans
Consider the advantages and disadvantages before getting an HFA loan.
Who is the HFA loan?
HFA loans may be suitable if they fall into at least one of these categories.
- First time buyer. Remember that this includes buyers who have not owned a home for the past three years.
- People with low or moderate income. To qualify, your income must be classified within the HFA income limits. HFAs are usually set annually and vary from state to state.
- Occupant of the owner. HFAs are available in major homes, not investment property or vacation homes.
- House hacker. An HFA loan may allow you to purchase a home of 2-4 units. This means you can fund a duplex, split townhouse, or small apartment building. You need to occupy one unit, a strategy known as “house hacking,” and rent the rest.
How to apply for an HFA loan
- Check out HFA options. You can find the HFA website using State’s guide to your first HomeBuyer program. Each has its own requirements for HFA loans and its own support options.
- Please contact the state Housing Department. Some HFAs allow you to request a call via an online form or call your agent directly.
- Find an approved mortgage lender. HFA loans are only provided through loan partners approved by HFA. You can find these lenders lists on the HFA website.
- Compare lender reviews and testimony. Some HFAs have over 50 lending partners, so you’ll want to narrow down your options.
- Take the Home Buyer Course. These are usually required to qualify for an HFA loan. The HFA website provides a list of approved courses.
- Apply for a mortgage. After creating a finalist, you can advance with pre-approval and application. If you are applying for an HFA loan, be prepared to provide all your financial information, including PaySubs and tax returns.
Other low-down payment mortgages
Whether you’re a first-time or a repeat home buyer, there are several other low-down payment mortgage options as well. Some of the most popular include:
- FHA loan: It is widely available than HFA loans. If you have a credit score of at least 580, you are eligible to place just 3.5%.
- VA loan: Only available to veterans, service members and surviving spouses. There is usually no down payment requirement.
- USDA loan: Only available to buyers in certain rural areas with low income and moderate incomes. There is no down payment requirement.
- HomeReady/Home Possible Loan: A 3-5% down payment is required. Reduce the costs of mortgage insurance. Available to buyers who make less than 80% of their local median income.
- Traditional 97 loans: Traditional mortgage with a down payment requirement of 3%.
