People interested in buying a home and who do not think they have the financial resources to do so may want to consider their local housing finance agency.
HFAs, as they are known, are state chartered organizations that offer potential low-to-middle-income homebuyers the ability to purchase a home with low upfront costs and monthly payments.
“The HFA loan is especially important for first-time home buyers. The goal is to make the process easier,” says Nicole Kristofferson, Realtor and founder of NMC Realty, a California-based real estate company. “With a loan, you have the ability to make lower down payments. , sometimes up to 3% of the purchase price, your monthly mortgage insurance premiums may go down as a result, and you may have the option of getting financial help for a down payment, as a loan or grant.”
Read on to learn more about the government-backed assistance program that helps people become homeowners they can’t afford.
What is an HFA loan?
HFA loans are provided through a partnership of state housing finance agencies (HFAs) and Fannie Mae and Freddie Mac, two federally backed mortgage companies set up by the US government. HFA loans are designed to make first-time home purchases affordable for people with low to moderate incomes. Often confused with FHA loans, which are loans the Federal Housing Administration provides to low-to-medium income borrowers. The programs are similar but offer different benefits.
HFA loans provide borrowers with lower monthly payments, help with closing costs, and help with down payments.
How HFA Loans Work
Both Freddie Mac and Fannie Mae offer their own HFA loan option. Fannie Mae offers ‘Preferred’, while Freddie Mac offers ‘Feature’. Both options are traditional fixed-rate mortgages, with a minimum down payment of 3%. With these loans, homebuyers are required to pay for Private Mortgage Insurance (PMI), but this is canceled when they pay the mortgage to 80% of their home’s value.
If you are interested in getting an HFA loan, be prepared to do some research. Find your local agency, research their requirements, and then reach out to get an application form.
Although HFA loans are good for first-time homebuyers, they are also offered to those who want to refinance. Fannie Mae’s preferred option has the option to refinance cash.
“The process is similar to other types of mortgages,” says Jason Gelius, a real estate agent with Community Choice Realty in Michigan and author of Think Like a REALTOR. Initial costs and monthly mortgage insurance tend to be lower compared to other types of loans. The application is completed just like getting any other form of mortgage.”
Who is Eligible for an HFA Loan?
To find out if you qualify, you’ll have to do some digging, as income requirements vary by state.
“Every local housing finance agency has its own rules, so it is important for borrowers considering HFA loans to contact their local agency before pursuing this type of loan,” says Michael Foguth, founder of Foguth Financial Group, a financial planning service.
For example, in Connecticut, your total income must be no more than 80% of the median income in the area where you are buying. But every state is different.
You will need to have a credit score of at least 620, and you may need to file your tax returns. Proof of income is also required to prove your ability to make the monthly payments.
How to apply for an HFA loan
If you are a potential home buyer interested in an HFA loan, start by searching for your local HFA agency. Browse their website and read up on their requirements. Then contact the office.
“They will get you the correct forms and direct you to their list of approved lenders that can start the process,” says Gilius. “The rest is like getting a regular mortgage.”
What are the HFA loan rates?
Those who qualify for HFA loans can expect lower rates than a typical mortgage. For example, on August 16, mortgage rates provided by the HFA in Connecticut were about 0.3% lower than the national average. Potential homebuyers will, again, have to make some inquiries to see what prices they can get.
“HFA loan rates vary by program and by borrower,” Kristofferson says. “It is always important to check with your local agency for further guidance. As with most loans, as a general guideline, the higher the credit score and higher the down payment, the lower the loan rate.”
HFA loan alternatives
“There is no one-size-fits-all when it comes to mortgage programs,” Kristofferson says. “What is best for one buyer may not work for you. It is smart to compare your options.”
If you do not qualify for an HFA loan or would like to compare it to other options, here are some other government agencies that provide assistance to potential homebuyers:
The FHA loan is designed for people with low to moderate incomes. FHA loans allow a 3.5% down payment which is good for those with low credit scores. A credit score of at least 580 is required to qualify, or 10% lower instead. With an FHA loan, the down payment can come in the form of a gift from a family member. This type of loan is popular with first-time homebuyers. With this loan, you are required to pay for PMI.
VA loans are for veterans, service members, and living spouses. This type of loan offers little or no down payment, low interest rates, and does not require mortgage insurance.
This is another type of loan designed for low to medium income buyers. USDA loans are backed by the USDA, and they offer financing with no down payment and low interest rates. Homes must be purchased in a “rural” area, which the USDA defines as an area with a population of less than 20,000.
HomeReady is provided by Fannie Mae and like the HFA loan, it is designed for low-income buyers. A minimum of 620 credit score is required and this loan provides a 3% down payment.
Home Possible is offered by Freddie Mac and is for low to low income borrowers. It also offers a down payment of up to 3%.