What is an HFA Loan?
It is easy to confuse the HFA loan with the FHA loan. But they are very different.
HFA stands for Housing Finance Agency or Authority. It refers to the agency in your state that provides advice – and sometimes financial assistance – to home buyers.
Through the HFA Loan Program, qualified buyers could be eligible for a 3 percent down payment mortgage and even down payment assistance.
In some cases, you don't have to be a first-time buyer. However, you will need a low to moderate income for the area you are buying in.
Check your eligibility for low down payment mortgages (April 19, 2021).
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How the HFA Loan Program Works
HFA loan programs are a partnership between the state housing authorities and Fannie Mae and Freddie Mac – the agencies that regulate most US mortgages.
HFA loans are designed to make home purchases more affordable for low to middle income people. They can offer lower upfront costs and lower monthly payments than standard mortgage programs.
These home loans are attractive to those who are eligible. You can:
Make a deposit of only 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. Mortgage insurance can be canceled later (unlike FHA loans).
You will likely need to get a loan from a lender who is on your HFA approved list. In general, however, you have a wide range of choices. So you can still search for your best deal.
In the meantime, either the HFA or your chosen lender should hold your hand throughout the process. So when obstacles arise, they should do their best to help you remove them.
The HFA loan program can make home buying more affordable and accessible for first-time home buyers who qualify.
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Conventional HFA Loan Programs
Fannie Mae and Freddie Mac each have their own HFA loan option. Fannie calls his product the HFA Preferred Mortgage. And Freddie calls it the HFA Advantage Mortgage.
For most borrowers, the two programs are virtually identical.
However, 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 houses of 2 to 4 units even though you have to live in one of the units.
Similarly, Fannie offers "limited withdrawal refinancing" while Freddie will not let you take cash out during closings.
Overall, you're more likely to be affected by your HFA's rules than Fannie or Freddie. However, you want to explain your goals to your HFA contact and ask them to help you choose your home loan.
Advantages and Disadvantages of HFA Loans
Here are the key pros and cons to consider when considering an HFA loan program versus other low down payment loans.
The professionals are very attractive to the right buyer:
Low 3% minimum down payment chance of receiving financial assistance from your HFA to help with down payment and potential closing costs. Lower monthly mortgage insurance payments compared to some other lower down payment loans. Stop paying for mortgage insurance if your equity * reaches 20%. on the value of the home – unlike FHA loans that require you to pay for it until you refinance, move, or repay your loan
This makes a great package for qualified home buyers.
* Home equity is the amount by which the market value of your home exceeds your mortgage balance. A traditional loan – including the HFA Preferred and HFA Advantage programs – allows you to cancel your mortgage insurance as soon as your equity reaches 20%. For example, if your home is worth $ 200,000 and your loan amount is $ 160,000, you might be able to cancel PMI and reduce your mortgage payments.
Another way to say this is to get mortgage insurance until your LTV (Loan-to-Value) is 80% or less.
However, the downsides mean that an HFA mortgage isn't the right home loan for everyone:
Disagreements across the country – Your local HFA's rules may differ from those of Fannie and Freddie. So you have to dig to find out if you are eligible and what DPA amounts vary. Some states and areas are more generous than others when it comes to down payment assistance on offer. You need a moderate or low income You need a different type of mortgage. You need a credit score of at least 620. – FHA loans only require 580 with a 3.5% decrease. You need to choose the right loan. – For most borrowers, Fannie and Freddie's loan products are practically the same. But one can trip you on a small point while the other lets you move forward. Your HFA should help you choose
Many borrowers will not be affected at all. But you should be aware of them.
Who is Eligible for an HFA Loan?
Since every real estate finance agency has its own set of rules, we cannot give you information that applies everywhere. Below are some general underwriting guidelines you might see when looking at HFA loan programs.
First-time and repeat buyers can be admitted
Some housing assistance programs are specifically aimed at first-time home buyers. However, this does not always apply to HFA loans.
For example, we randomly picked a state (Connecticut) and visited their HFA loan website. And the Connecticut Housing Finance Authority says, "You must be a first time homebuyer or have not owned a home in the last three years."
But Fannie and Freddie don't have this rule. And Fannie says, "No requirement for first-time buyers (you might be eligible even if you've bought homes in the past.)"
So each HFA can apply its own rules that go beyond those of Fannie and Freddie. You will need to check with your state or region for the offers and restrictions.
Income limits apply
HFA loans are designed to help low to middle income people. You probably won't get them if you're a high-flyer at work. But as Freddie says, "HFAs set their own income limits."
In our randomly selected state of Connecticut, the HFA states that your gross income cannot exceed 80% of the Area Median Income (AMI). Fortunately, it offers a map that lists both income and sales price limits for each city and county. If you are buying in this state, all you have to do is click where you want to buy to get the information you need.
It is likely that your state's HFA has a similar map or other search tool that provides the same information. If you can't find one, call the office. They are there to help.
And your state may be more generous than an 80% AMI limit. So check.
Other borrower requirements
You will likely need to meet the standard Fannie and Freddie credit score requirements. The agencies require a FICO minimum score of 620.
And lenders want to be sure that you can easily afford the monthly payments. So you're going to check that you don't have to spend too much of your monthly income on debt payments and other inevitable financial obligations like child support or alimony.
This is known as the debt-to-income ratio (DTI). Here you can learn more and find out how to calculate yours.
Some loans also require you to demonstrate that you have savings or easily accessible reserves – an emergency fund. Freddie says "No Reserve Required" on his HFA loans, but again, individual lenders can set their own requirements.
Finally, a homebuyer training course may be required to qualify. These courses are often free and offered online.
Suitable property types
If your HFA allows it, you can use these loans to buy a home or refinance your existing one. However, Freddie does not allow withdrawal refinancing and only limited funding from Fannie.
As long as HFA rules allow, Fannie Mae's HFA Preferred program allows you to purchase a single-family or multi-family home of up to four units. However, the Freddie Mac HFA Advantage loan only allows one-unit real estate.
Suitable property types can include single family homes, condominiums, planned unit developments (PUDs), and qualified prefabricated homes.
Both organizations require that you purchase your primary residence. So you cannot buy an investment property or vacation home.
How to Apply for an HFA Loan
First, find your state's HFA in this directory, click the link to its website, and read it. Then request more information and instructions.
If the person you are speaking to thinks your application can be successful, they will send you the required forms. And your HFA should keep holding your hand – or at least until a lender takes over for you.
Also note that some cities and counties have their own HFAs. So be sure to check out all of the options.
What deposit help could I get?
Some HFA programs offer low-interest loans to cover part or all of the down payment that you pay back in parallel with your main mortgage.
Others offer forgivable loans, which means you make no payments and the loan disappears after you've lived in the home for a certain number of years.
Still others offer direct grants: effectively gift money that never has to be paid back.
Again, each HFA sets its own rules for the down payment assistance it offers. So what you get and whether you are eligible depends on the generosity of your state or region.
An example from Florida
While researching this article, we came across the offer from Florida (PDF). This means that authorized persons can choose from three programs to support the deposit:
Florida Assist Loan Program – Borrow up to $ 7,500 at 0% interest. You don't pay a penny until you move, sell, or refinance *. But then you have to repay everything HH PLUS Second Mortgage – Helps with closing costs as well as down payments. This is a five year loan with 0% interest. You don't make monthly payments and 20% is given every year. So after five years you no longer owe anything. It is a present! Home Loan Program – You borrow up to $ 15,000 at 3% interest over a 15 year period. You pay it out monthly. If you move, sell or refinance * during this time, the balance must be paid in full
* Florida's document is more specific and loans are due when you "sell, refinance, transfer, repay first mortgage, or no longer make the property your primary residence".
If your HFA's Down Payment Assistance Program (DPA) isn't providing the help you need or not, ask about other data protection agencies operating in your state.
There are thousands of aid programs across the country, most of which are not HFAs. So it is worth looking into if there is another local option that is more inclusive and generous.
Obviously, if you are not receiving assistance from your HFA then it is unlikely that you would be eligible for an HFA loan.
Check out Fannie's HomeReady and Freddie's Home Possible mortgages instead. These have similar rules and allow 3% less.
Oh, and there is another bonus. A 2018 academic study found, "Descriptive evidence shows that these government-subsidized programs help financially vulnerable households move into home ownership and keep their homes at higher rates than lower-income households who buy homes in the private market."
HFA loans compared to other conventional loans
HFA loans aren't the only conventional mortgages that offer low down payments and special features.
Fannie and Freddie have others, including the ones mentioned earlier: HomeReady and Home Possible. The down payment help can also be used with these loans.
So why get an HFA loan? Well there could be three main reasons:
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It can be easier if your income is below average, as pretty much everyone in the program is on the same boat. So lenders could make it easier for you to qualify. With some HFAs, by granting you a loan, you can get some privileges when it comes to assistance with the down payment. You might even be at the top of the line. Especially if you are a first-time home buyer, you may appreciate having someone by your side who is knowledgeable about the HFA. And it's comforting to know that you can always call for help or advice
So the knowledge and support that comes with the HFA program could have tangible benefits.
However, if you don't qualify, the other 3 percent Fannie and Freddie loans are great options.
HFA vs. FHA mortgages
We mentioned above how easy it is to confuse FHA loans with HFA loans. But they are very different. Here's why.
FHA loans are mortgages secured by the Federal Housing Administration, a branch of the Department of Housing and Urban Development (HUD).
Unlike the HFA program, FHA loans are available from almost every major lender.
Main features of FHA loans compared to HFA loans are:
Higher Down Payment – At least 3.5% of Purchase Price Lower Minimum Credit Rating – 580 Not an Easy Exit from Mortgage Insurance – Typically, you will have to pay the premiums monthly until you refinance, sell, or zero your loan balance. No requirements for first time buyers – As with Fannie and Freddie. However, your HFA may have different rules
These are popular mortgages.
The monthly cost of mortgage insurance is the main disadvantage for many potential buyers. However, it is possible to cancel your FHA mortgage insurance by refinancing on a traditional loan once you have 20% equity. So don't think that you will hold onto it forever.
Key Features Compared To FHA Loans:
Lower down payment – at least 3% of the purchase price. Higher minimum creditworthiness – 620 Safe exit from mortgage insurance – End the payment as soon as your mortgage balance has fallen to 80% of the market value of your home
These are attractive advantages. However, HFA loans are less common than FHA. You can easily apply for an FHA mortgage from almost any lender, and there are no additional steps (such as working with a local HFA representative).
Because of their availability and milder requirements, FHA loans are popular with first-time buyers looking to get their foot in the door.
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HFA loan FAQ
What is the HFA benefit?
HFA Advantage is a mortgage program offered by Freddie Mac in partnership with the local Housing Finance Authorities. These loans are usually cheaper than traditional mortgage programs and may include down payment help. Fannie Mae has a similar program called HFA Preferred.
Is an HFA Loan a Traditional Mortgage?
Yes. A conventional mortgage is one that is not funded by the federal government. Although HFA loans are offered by local governments, they don't have government support like the FHA, VA, or USDA programs. So they are considered conventional.
How do you qualify for an HFA mortgage?
The main rules are that you must have a credit score of 620, be able to easily afford the payments, and have an income that is low to moderate for the area in which you are buying. However, specific admission requirements vary by state and program.
What is the minimum down payment for an HFA mortgage?
You have to pay at least 3% of the purchase price of the house.
Can I use down payment aid on an HFA mortgage?
You bet! For some, this is one of the greatest attractions of the HFA loan program. You may be standing for a loan or grant (gift) worth thousands for your down payment and possibly closing costs.
Do HFA Mortgages Have a PMI?
Yes. You must pay monthly private mortgage insurance premiums until your mortgage balance drops to 80% of the market value of your home. You can then stop making payments.
Can I use the HFA Preferred program to refinance?
Yes, eligible homeowners can use these programs to refinance their existing mortgage loans. In fact, you can get limited cashback with Fannie Mae's HFA Preferred Mortgage. You can also refinance yourself with Freddie's HFA benefit, but no cashback is possible. Note that your HFA may have its own rules for refinancing these trump cards from Fannie and Freddie.
Is the HFA program for first-time buyers only?
Not at all. Fannie and Freddie both welcome seasoned (repeat) buyers. But not all HFAs do this. So check your local guidelines. These types of programs often define a first-time home buyer as someone who has not owned a home in the past 3 years.
What are HFA Loan Mortgage Rates?
Interest rates on HFA loans can be lower than mainstream loans. However, they can vary greatly depending on the program and borrower. So ask your local HFA for advice. Once you have decided on a lender, you will receive several quotes and compare their prices and costs to find the best one.
Do I Qualify for an HFA Loan?
You will need to check with your local Housing Finance Authority to see if you qualify for an HFA loan. Even if you don't, there are other conventional 3% decrease loan programs that are widely available. So, explore all of your options and find the right low down payment loan for you.
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