Guide To HFA Loans | Bankrate

Although it is often confused with an FHA loan, an HFA loan is another type of mortgage offered through a partnership between Fannie Mae, Freddie Mac, and government 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 buyers or low- and middle-income borrowers. With an HFA loan, you can have lower monthly mortgage payments that better fit your budget, and get assistance with closing costs and down payment to meet the upfront cost of buying a home.

Insight into the bank rate

An HFA loan and an FHA loan may sound the same – and have similar characteristics, such as a low down payment – but they are two different types of mortgages.

While their exact role and relationship with their state government will vary, home finance agencies support affordable housing initiatives, including assisting home buyers and tenants. HFAs typically act as independent organizations overseen by a board of directors appointed by the state governor. They can be related to the “authority”, “commission”, “corporation” or “department” of the state, but serve essentially the same purpose: to meet the needs for housing and community development in the state.

This is how HFA loans work

Fannie Mae and Freddie Mac, two government sponsored companies (GSE) that support much of the mortgage market in the United States, each offer an HFA loan option. At Fannie Mae it is called the “HFA Preferred” mortgage program. With Freddie Mac you will come across “HFA Advantage”.

Fannie Mae and Freddie Mac work with HFAs across the country to offer these loans through a selection of approved mortgage lenders. The HFA itself does not finance them.

Both the HFA Preferred and HFA Advantage options are conventional fixed-rate loans with a minimum down payment of 3 percent and can be combined with a down payment assistance from an HFA. Down payment assistance can be funded as a second mortgage or as a forgivable loan, or as a non-repayable grant, depending on your HFA’s offering.

Although these loans are ideal for first time home buyers, they are available to borrowers at all stages. If you are a first time home buyer or have not owned a home in the past three years, you must take a homebuyer course to qualify.

If you’re depositing less than 20 percent with an HFA loan, you’ll need to pay for mortgage insurance as well. As with other traditional loans, if you pay back your mortgage for 80 percent of the value of your home, this can be canceled, but an HFA loan also has reduced insurance options – depending on your income and mortgage lending value – that can help you save.

In addition to buying a home, HFA loans can also be used for refinancing. The HFA Preferred option allows limited funding through withdrawals, but the HFA Advantage program does not.

Who is Eligible for an HFA Loan?

You may be eligible for an HFA loan whether this is your first time or repeat home purchases. However, depending on your state, it may only be available to repeat buyers if the buyer purchases a home in a specific “destination”.

To qualify, your income must be within the HFA income limits, which are usually set annually and vary from state to state. You also need to take out the loan for your primary residence that you intend to live in, not an investment or a second home. An HFA Advantage loan can only be used on a single family home (such as a single family home or condo); an HFA preferred loan can be for a property of up to four units.

Other eligibility requirements, such as minimum creditworthiness and maximum debt to income ratio, are determined by the HFA and the lender the HFA works with. So, you’ll need to contact the HFA to see if you’re meeting them. Fannie Mae and Freddie Mac generally require a minimum credit score of 620, so consider this as an underlying asset.

What are HFA Lending Rates?

HFA loan rates vary by HFA and lender, but can sometimes be more competitive than the market rates for other types of loans. You can compare HFA loan rates to bank rate mortgage rates.

How to Apply for an HFA Loan

1. Explore the options of your HFA. Each HFA has their own HFA loan requirements and could also offer alternative programs and assistance. You can find your HFA’s website through the Bankrate’s Guide to First Home Buyer Programs by State.
2. Contact the HFA. Depending on the HFA, you can either fill out an online form for more information or call the agency directly.
3. Find an approved mortgage lender. HFA loans are only offered through loan partners approved by your HFA. A list of these lenders can be found on your HFA’s website. Compare the ratings and testimonials from lenders to narrow down your options. From there, you can proceed with a pre-authorization and application, as well as a home buying course if necessary. When applying for an HFA loan, prepare to hand over all of your financial information, including payroll and tax returns.

Other low down payment mortgages

Whether you are a first time or repeat buyer, there are several low down payment mortgage options. Some of the most popular include FHA loans that require a 3.5 percent down, and VA loans and USDA loans that require no down payment at all.

Fannie Mae and Freddie Mac also offer HomeReady and Home Possible loans, as well as the Conventional 97 loan, all with just 3 percent down payment. Depending on your eligibility, these can be viable alternatives to an HFA loan.