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What is an HFA loan?

State agencies have programs for low-income homebuyers

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Written by Jennifer Schurman
Edited by Cassidy McCants
couple putting sold sign on a for sale sign in front of house

With rent payments continuing to rise year after year, the lack of affordable housing is a huge problem in the U.S. today. According to the National Low Income Housing Coalition, there’s a “shortage of 7 million affordable and available rental homes” for renters with extremely low income.

You might dream of becoming a homeowner with a fixed monthly mortgage to get out of renting, but what if you don’t bring in enough income to qualify for a traditional home loan?

An HFA (housing finance agency) loan could be an option. These mortgages are provided by state housing finance agencies to offer more affordable options for first-time buyers and borrowers with low to moderate incomes. Unlike other mortgage loan alternatives, an HFA loan could help cover both your closing costs and down payment requirements.

How an HFA loan works

HFA loans are for homebuyers who might not be able to afford a large down payment but otherwise qualify for a home loan — with this kind of mortgage, you could be eligible for a down payment of only 3%.

With an HFA loan, you could have lower monthly mortgage payments that better fit your budget and get closing cost and down payment assistance to help with the upfront costs of buying a home.

These mortgages are available thanks to a partnership between Freddie Mac or Fannie Mae and state housing finance agencies, which are federally backed mortgage companies created by Congress that provide affordable mortgage loans.

HFA loan servicers may offer Freddie Mac HFA Advantage and/or Fannie Mae HFA Preferred mortgages, which have specific sets of eligibility requirements.

If you plan to use an HFA loan to purchase a home, the home must be used as your primary residence, and your loan-to-value ratio must be no higher than 97% (so you’ll need to offer at least a 3% down payment).

Many HFAs offer closing cost and down payment assistance programs. They may also allow gifts from family and friends to reduce out-of-pocket expenses, according to Jennifer Ashley, a mortgage loan officer at ConsumerAffairs.

To apply for an HFA loan, you’ll need to find a participating lender from your state’s HFA website. The process is similar to that of other mortgage loans: You’ll submit an application with the lender and go through the underwriting process; you’ll need to provide proof of income, like W-2s and pay stubs, so the underwriter can determine if you qualify.

HFA vs. FHA loans

HFA loans and FHA loans sound similar, but there are many differences between the two. For one, FHA loans are backed by the Federal Housing Administration, while HFA loans are backed by either Freddie Mac or Fannie Mae. FHA loans are much more widely available than HFA loans.

The eligibility requirements of HFA loans and FHA loans also differ. For instance, HFA down payment requirements are slightly lower (3%, while the FHA asks for a 3.5% minimum). Also, some HFA loans include assistance to cover some of the initial costs. As a general rule, HFA interest rates are comparable to FHA rates.

HFA loans have higher credit score minimums than FHA loans (620 compared to 500). However, you may pay less in mortgage insurance premiums with an HFA loan — you can cancel PMI once you reach 20% equity. With FHA loans, you’ll have to pay for mortgage insurance over the life of the loan, but borrowers who put down 10% or more can usually have their FHA MIP canceled after 11 years.

Also, FHA mortgage insurance includes both an upfront cost, paid as part of your closing costs, and a monthly cost, included in your monthly payment.

HFA loans

  • Down payment: 3%, with down payment assistance programs available to those that qualify
  • Credit score minimum: Varies depending on LTV ratios (often 620 or greater)
  • Mortgage insurance requirements: None with a 20% down payment (for LTV ratios over 80%, you’ll have to pay mortgage insurance premiums based on your down payment, loan amount and loan term); you can cancel PMI once you’ve reached 20% equity
  • Rates: Vary by state and borrower

FHA loans

  • Down payment: 10% for borrowers with credit scores between 500 and 579; 3.5% for those with scores over 580
  • Credit score minimum: 500
  • Mortgage insurance requirements: Upfront MIP is typically 0.85% up to 1.75% of the total loan amount; annual MIP, which is generally paid in monthly installments, can vary depending on the loan terms and the initial LTV ratio (can range from 0.45% to 1.05% of the loan amount)
  • Rates: 30-year fixed FHA loan rates average slightly over 5% at the time of publishing, but rates change regularly

Who qualifies for an HFA loan?

Many first-time homebuyers and low- to moderate-income borrowers may be eligible for HFA loans. Each state agency has different requirements that change regularly, so you’ll want to check your state’s housing agency website to learn more. You can also use the site to search for mortgage lenders that offer HFA loans in your area.

In general, you’ll want a credit score of at least 620 and a DTI at or below 45%. You may also be required to take a homebuyer education course if you’re a first-time homebuyer. Income limits and loan amount maximums depend on your specific location — you will be limited to a maximum home sale price based on your area.

Bottom line

HFA loans are geared toward individuals with low to moderate incomes. They aren’t as widely available as other financing options, but you can search for HFA loan options through your state’s housing finance agency. This type of loan may be a great opportunity if you’re a first-time buyer without a lot of cash saved up for a down payment. HFA loans may also come with down payment assistance and savings on mortgage insurance.

However, if you have excellent credit and can offer a considerable down payment, you may get better rates with a different conventional mortgage. Also, keep in mind that you won’t qualify for an HFA loan if your income surpasses the limit, so you’ll need to reach out to your state’s HFA for eligibility requirements.

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. To learn more about the content on our site, visit our FAQ page.
  1. Federal Insurance Deposit Corporation, “Products Offered by State Housing Finance Agencies.” Accessed April 5, 2022.
  2. National Council of State Housing Agencies, “About HFAs.” Accessed April 5, 2022.
  3. Freddie Mac, “HFA Advantage.” Accessed April 5, 2022.
  4. Fannie Mae, “HFA Preferred.” Accessed April 5, 2022.
  5. Freddie Mac, “HFA Advantage vs. FHA: a side-by-side comparison.” Accessed April 6, 2022.
  6. Fannie Mae, “Eligibility Matrix.” Accessed April 6, 2022.
  7. National Low Income Housing Coalition, “The Gap: A Shortage of Affordable Homes.” Accessed April 19, 2022.
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