Although often confused with an FHA loan, an HFA loan is a different type of mortgage offered through a partnership between Fannie Mae and 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 home ownership more affordable for first-time homebuyers or low- or middle-income borrowers. With an HFA loan, you can have lower monthly mortgage payments that better fit your budget, have closing cost and down payment assistance to help with the initial cost of buying a home.
An HFA loan and an FHA loan may look the same — and have similar characteristics, like a low down payment — but they are two separate types of mortgages.
While its specific function and relationship to state government varies, housing finance agencies support affordable housing initiatives, including assisting homebuyers and renters. HFAs usually operate as independent organizations, overseen by a board of directors appointed by the state governor. It may be referred to as a state’s housing “authority,” “committee,” “company,” or “department,” but it serves essentially the same purpose: to address the state’s housing and community development needs.
How HFA Loans Work
Fannie Mae and Freddie Mac, two government-sponsored companies (GSEs) that support a significant portion of the US mortgage market, each offer an HFA loan option. With Fannie Mae, it’s called the “HFA Preferred” mortgage program. With Freddie Mac, you will experience the “HFA Advantage”.
Fannie Mae and Freddie Mac work with REITs across the country to provide these loans through a select group of approved mortgage lenders. The Hyogo Framework itself does not fund it.
Both HFA Preferred and HFA Advantage options are traditional fixed rate loans with a minimum down payment of 3%, and they can be combined with down payment assistance through HFA. Down payment assistance can be funded as a second mortgage or revocable loan, or it can be a grant that does not 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 are a first-time buyer – or have not owned a home in the past three years – you will be required to take a home buyer education course to qualify.
If you provide less than 20 percent of your HFA loan, you will also be required to pay for mortgage insurance. As with other traditional loans, this can be canceled when you pay off your mortgage to 80 percent of your home’s value, but with an HFA loan, there are also discount 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 for refinancing. The HFA Preferred Option allows limited external cash refinancing, but the HFA Advantage program does not.
Who is Eligible for an HFA Loan?
You may qualify for an HFA loan whether you are a first-time homebuyer or are buying a home again. However, depending on your situation, it may only be available for repeat purchase if the buyer is buying a home in a specific “target area”.
To qualify, your income must fall within the HFA’s income limits, which are usually set annually and vary from state to state. You will also need to take out a loan for your primary residence where you intend to live, not for an investment or a second home. An HFA benefit loan can only be used for one unit (such as a single family home or apartment); The HFA loan of choice can be for a property with up to four units.
Other eligibility requirements, such as a minimum credit score and a maximum debt-to-income ratio, are determined by the Hyogo Framework and the lender with which the Hyogo Framework works. So you’ll need to get in touch with the HFA to see if you’ll meet with them. Fannie Mae and Freddie Mac generally require a credit score of at least 620, so keep in mind that this is a baseline.
What are the rates for HFA loans?
HFA loan rates vary based on the HFA and the lender, but can sometimes be more competitive than market rates for other types of loans. You can compare HFA loan rates to mortgage rates on Bankrate.
How to apply for an HFA loan
- Explore your HFA options. Each HFA has its own requirements regarding HFA loans, and may also offer alternative programs and assistance. You can find your HFA location through the Bankrate Directory of First-Time Home Buyer Programs by state.
- Call the HFA. Depending on the HFA, you can either fill out an online form to get in touch with you for more information, or contact 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 website. Compare lender ratings and testimonials to help narrow your choices. From there, you can proceed with the pre-approval, application, and home buyer course, if necessary. When you apply for an HFA loan, be prepared to turn in all of your financial information, including payment lists and tax returns.
Other Low Down Payment Mortgages
Whether you’re buying a home for the first time or a repeat purchase, there are many low-paying mortgage options. Some of the most popular include FHA loans, which require a 3.5 percent reduction, as well as VA and USDA loans, which require no down payment at all.
Fannie Mae and Freddie Mac also offer HomeReady and Home Possible loans, respectively, in addition to the 97 Conventional Loan, all with a payment clause of just 3 percent. Depending on your eligibility, these may be viable alternatives to an HFA loan.