What is an HFA loan? (2023)

State agencies have programs for low-income homebuyers who can’t afford a down payment

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Updated: 09/06/2023

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With rent payments continuing to rise year after year, the lack of affordable housing remains a huge problem in the U.S. As a result of decades-high inflation and other factors, nearly 2 in 5 potential homebuyers could not make a down payment of at least 5% in 2022, according to The Mortgage Reports.

This puts buyers who might otherwise qualify for a conventional home loan in a difficult position. What if you have steady income and a credit score above 620, but can’t save enough for a large down payment?

An HFA (housing finance agency) loan could be an option. Provided by state housing financial agencies and backed by Fannie Mae and Freddie Mac, these mortgages allow for down payments as low as 3% and can even offer financial assistance with your closing costs.

Key insights

HFA loans are designed to help borrowers with low to moderate income who might meet the qualifications for a conventional loan but can’t afford a down payment.
HFA loans accept down payments as low as 3% and offer financial assistance to help with closing costs.
Each state has its own HFA eligibility requirements, but you’ll typically need a credit score above 620 and a debt-to-income ratio at or below 45%.
While HFA loans help credit-qualified borrowers who need help with a down payment, FHA loans help credit-challenged borrowers who can mostly afford a down payment.

How an HFA loan works

An HFA loan is a special type of mortgage that’s sponsored by your state’s housing financing agency, or HFA.

In a general sense, an HFA loan is designed to help homebuyers with low to moderate income and a minimum 620 credit score apply for a home loan. If you can’t afford a down payment but are otherwise qualified for a conventional mortgage, an HFA loan might be worth considering.

HFA loans are characterized by:

Allowing down payments as low as 3%
Offering financial assistance with your closing costs
Offering discounted private mortgage insurance (PMI)
Requiring borrowers to take a homebuyer education course to qualify

“The educational portion of the HFA loan isn’t discussed on a regular basis,” said Jonathan Harris, a mortgage advisor at Pinnacle Financial Partners. “It’s a pretty standard requirement across state lines.”

For context, Fannie Mae says that its proprietary homebuyer education course, HomeView, takes around three to four hours to complete and covers topics such as saving for a home, working with a real estate agent and getting ready to close.

HFA Preferred vs. HFA Advantage

HFA loans are available thanks to a partnership between Fannie Mae or Freddie Mac (companies created by Congress to provide affordable mortgage loans) and your state’s HFA.

Fannie Mae’s HFA loan is called HFA Preferred, while Freddie Mac’s is HFA Advantage. There are very subtle differences, but for most borrowers the two programs will look and act identical. They’re both fixed-rate mortgages with 3% minimum down payments.

HFA loan requirements

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. You can also use your state’s HFA site to search for mortgage lenders that offer HFA loans in your area.

In general, you’ll typically need to meet these qualifications:

Credit score: 620-plus
Debt-to-income (DTI) ratio: 45% or lower
Income limits: Can vary between 30% and 80% of the area’s median income
Home sale price limit: Typically at or below the median sale price for the area

For example, in order to qualify for the Georgia Dream program you must not have owned a home in the past three years, have a household income below $86,500 ($99,500 for three-plus-person households) and be looking at homes with a sale price below $350,000 (among other qualifications).

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 (LTV) ratio must be no higher than 97%, which is why you’ll need to offer a down payment of at least 3%.

If you can’t afford 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 former mortgage loan officer at ConsumerAffairs.

» MORE: How much house can I afford?

HFA vs. FHA loan

While they’re easy to mix up at a glance, HFA and FHA loans are two separate types of mortgage loans.

FHA loans are insured by the Federal Housing Administration and, like HFA loans, permit a low down payment (generally 10%, but as low as 3.5%, depending on your credit). Unlike HFA loans, which require a credit score of 620 or higher, FHA loans are specifically designed for low-credit borrowers.

“The biggest advertisement for an HFA loan is the 3% minimum down payment, whereas FHA loans are more for credit-challenged borrowers who actually have a down payment ready,” explained Harris.

	HFA	FHA
Backed by	Freddie Mac or Fannie Mae	Federal Housing Administration
Minimum down payment	3%, with down payment assistance available	3.5% with credit score 580+ 10% with credit score 500-579
Minimum credit score	620	500 (though 580 is more realistic)
Mortgage insurance requirements	Cancelable once you reach 20% equity	Paid monthly throughout the life of the loan (Borrowers who put down 10% can usually cancel after 11 years)
Eligibility requirements*	DTI ratio less than 45% Home must be primary residence Borrower income limits Home sale price limits	DTI ratio less than 43% Home must be primary residence
Rates	Vary by state and borrower	30-year fixed FHA loan rates average over 7.25% at the time of publishing, but rates change regularly

* May vary by state

“While the FHA will technically allow a 500 credit score, I’ve never seen a loan approved at that rate,” said Harris. “Real world, there aren’t too many companies that will go down to 500.”

A more realistic minimum credit score for an FHA loan is 580, “and that’s an expectation I’m passionate about setting.

» COMPARE: Best FHA loan lenders

HFA loan pros and cons

Compared with other 3% loan types, the biggest advantage of the HFA loan is the additional financial assistance available to help with closing costs.

Subjectively, the biggest drawback might be the long list of state-specific eligibility requirements that could disqualify you or your co-signer from the loan.

Pros

Low down payment. Qualified HFA borrowers may be able to make down payments as low as 3%.
Financial assistance available. Depending on your state, you may qualify for assistance with your down payment and/or closing costs.
Cancel PMI sooner. HFA loans automatically cancel your PMI once you reach 20% equity in your home.

Cons

Requires 620+ credit score. HFA loans are not designed to help low-credit buyers.
Income limitations. If you make above the median household income for your area, you may not qualify.
Home sale price ceilings. Though it varies by state, most HFAs impose limits on the maximum sale price of the home you can purchase.

How to apply for an HFA loan

To apply for an HFA loan, first find your state’s HFA program and ensure that you and your co-signer(s) meet the eligibility requirements. You can find a list of state-specific housing financing agencies on the National Council of State Housing Agencies website.

Next, connect with a lender. Each state-specific HFA website will have a list of participating lenders with contact information.

From there, the process looks similar to that of other mortgage loans. You’ll submit an application with the lender and go through the underwriting process, providing proof of ID, income, employment and more.

» MORE: How to get a mortgage

FAQ

Are HFA loans only for first-time buyers?

No, but if you’ve owned a home within the past three years you may not qualify for HFA loans in some states.

Do HFA loans have lower interest rates?

HFA loans can have lower interest rates than conventional mortgages and even FHA loans. To illustrate, at the time of this writing, the prime mortgage rate was 8.50%, the FHA rate was 7.25% and the Georgia Dream HFA loan rate was 6.375%.

What’s the minimum down payment for an HFA mortgage?

The minimum down payment for HFA loans is 3%.

Do HFA mortgages require PMI?

Yes, like other conventional mortgage loans, you can cancel your PMI once you have 20% equity in your home.

Bottom line

HFA loans are geared toward individuals with low to moderate incomes who might otherwise qualify for a conventional mortgage but can’t afford a large down payment. Each state has its own HFA loan requirements, but if you qualify, you could make a down payment as low as 3% and apply for additional financial assistance with closing costs.

If you can afford a down payment but have a credit score between 580 and 620, an FHA loan might be a better fit. And if you have both excellent credit and the funds for a down payment, you may get a lower monthly payment with a conventional mortgage.

Article sources

ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:

The Mortgage Reports, “39% of Home Buyers Can’t Afford 5% Down Payment.” Accessed Aug. 28, 2023.
U.S. Bank, “Today’s 30-year FHA mortgage rates.” Accessed Aug. 28, 2023.
Georgia Department of Community Affairs, “Homebuyers.” Accessed Aug. 28, 2023.

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