HFA Loan Programs: Benefits, Eligibility, and Application Guide

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• HFA loans are an extremely affordable type of mortgage offered by state housing finance agencies.
• These loans often come with low down payments, below-market mortgage rates, and grants or other forms of assistance.
• Most HFA loans come with income limits and require a decent credit score.

For hopeful homebuyers with lower incomes and little savings for a down payment, becoming a homeowner can seem way out of reach. Fortunately, there are a number of programs available that can make buying a home more affordable. Many states offer this kind of assistance in the form of HFA loans.

If you're hoping to buy a home one day but aren't sure you'll be able to afford it, an HFA loan could help you achieve your goal.

What is an HFA loan?

Not to be confused with the popular FHA loan, a housing finance agency mortgage, or HFA loan, is a type of mortgage geared toward first-time and low-to-middle income homebuyers.

Purpose of HFA loans

These loans are available through housing finance agencies, which are state-affiliated organizations that promote affordable housing for owners and renters in the communities they serve.

How HFA loans work

The rules around who can get an HFA loan and how to apply for one vary depending on the state you're in. If you want to know the specific guidelines for your state's HFA loan program, visit that agency's website. Here are some general things you can expect.

The application process

You won't apply for an HFA loan directly through the agency that administers the program. Instead, you'll work with an approved mortgage lender .

If you're already working with a lender, you can ask if they offer loans through your state's HFA. For example, Flagstar Bank partners with HFAs in a few different states to offer HFA loans. Your state's HFA may also have a list of approved lenders on its website.

Qualifying for an HFA loan

HFA loans often require borrowers to have good credit scores , typically of 620 or higher. You may also need to take a homebuyer education course.

Depending on the program, you may have to to be a first-time homebuyer or be purchasing in a specific area if you're a repeat buyer. Each HFA sets its own income limits for these loans. It may set a single maximum income limit or set limits based on household size or county.

The HFA may also set price limits on the home purchase and require a minimum borrower contribution (often $1,000).

You'll only be able to use an HFA loan for a primary residence. This means you can't use it to buy a second home or investment property.

Benefits of HFA loans

Homeownership has become prohibitively expensive for many would-be homebuyers in recent years.

"We're in a situation where we have higher market values, limited inventory, and stagnant wages," says Tai Christensen, co-founder and president of down payment assistance provider Arrive Home .

As home prices have increased, it's become more difficult to afford both the upfront and ongoing costs of owning a home. But HFA loans can make both of these costs more manageable.

Low down payments and assistance programs

Christensen says that the down payment is the biggest barrier to homeownership for most borrowers. The assistance you get with an HFA loan can remove this barrier and enable you to save your money for other home-related costs.

"It is shocking how many people completely deplete their savings account [to make a down payment]," she says. "You've still got moving expenses, you've still got remodeling expenses. You're still going to want new furniture or to paint, or your refrigerator's going to go out two months after you move in."

HFA loans allow low down payments, often requiring a minimum of just 3% down. They also generally offer down payment and closing cost assistance, significantly limiting the amount of your own cash you'll need to bring to closing.

The amount of assistance you'll receive depends on individual program limits. Assistance may come in the form of a grant, which doesn't need to be repaid, or a loan.

Down payment loans are often either:

• Forgivable, meaning you won't need to pay it back if you meet certain conditions (like if you stay in the home for a minimum number of years)
• Paid back on a monthly basis, like a regular installment loan
• Deferred until you sell, refinance , or finish paying off the first mortgage, at which point you'll owe the full amount

Reduced interest rates

HFA loans typically come with lower mortgage rates compared with what you'd pay on a regular mortgage. This will reduce how much you pay each month and over the life of the loan.

You may also pay less for private mortgage insurance with an HFA loan, further lowering your monthly payment.

Tax credits

HFAs also administer mortgage credit certificate programs if the state offers them. MCCs give eligible first-time homebuyers a tax credit for a portion of the interest they pay on their mortgage each year.

If your state has an MCC program that you qualify for, you could get a dollar-for-dollar tax credit for up to $2,000 per year. These don't need to be combined with an HFA loan, but they often can be.

Comparing HFA loans to other mortgage options

HFAs may offer multiple types of mortgages, including conventional and government-backed loans . But they're different from the standard versions of these loans.

HFA loans vs. FHA loans

FHA loans are mortgages backed by the Federal Housing Administration. They're geared toward first-time and low-income homebuyers since they come with less stringent requirements and allow down payments of 3.5%. They also tend to have better rates than conventional loans.

To get an FHA loan, you'll need a credit score of at least 580.

Your HFA may also offer FHA loans, but these often require higher credit scores. So if you have a lower credit score , you might be better off applying for an FHA loan without going through a state-affiliated housing finance agency. But you won't benefit from other forms of HFA assistance, like down payment grants.

HFA loans vs. conventional mortgages

Conventional loans are mortgages that aren't insured by a federal agency like the FHA. Instead, they're often backed by Fannie Mae or Freddie Mac, the government-sponsored entities that purchase mortgages from lenders to provide liquidity to the mortgage market.

Non-HFA conventional loans typically require a minimum down payment of 3% and a credit score of at least 620. These requirements may be the same for conventional loans borrowed through an HFA loan program, though some HFAs have slightly higher credit score requirements.

Fannie Mae and Freddie Mac both offer mortgage products for HFAs. Fannie's is called HFA Preferred, and Freddie's is HFA Advantage.

Other affordable mortgage options

Many of the best mortgage lenders for first-time homebuyers offer their own affordable mortgages that come with low down payment requirements and extra cash assistance.

If the down payment and closing costs are your biggest hurdle, Christensen recommends searching online for assistance. She says DownPaymentResource.com is a helpful tool that lets homebuyers easily see down payment programs they might qualify for.

How to apply for an HFA loan

Required documents

As with all mortgages , you'll need to provide your lender with documentation showing your income and assets. You'll also give the lender permission to look at your credit score and history. All of this information will be used to determine how much house you can afford, as well as ensure that you meet the HFA's requirements.

Finding your state's HFA

You can find your state HFA's website using the list of HFAs from the National Council of State Housing Agencies.

HFA loans FAQs

What makes HFA loans different from FHA loans?

FHA loans are backed by the Federal Housing Administration and offer low down payments and less stringent credit requirements. HFA loans are offered through housing finance agencies and typically come with down payment assistance. You may be able to get an FHA loan through your HFA.

Can you refinance with an HFA loan?

If you have an HFA loan and want to refinance, make sure you understand what will happen with any down payment loans you owe. If you want to refinance into an HFA loan, you'll need to see what, if any, refinance products your state's agency offers.

Are HFA loans available to all homebuyers or just first-timers?

It depends on your HFA's rules. Some HFA loans are limited to first-time homebuyers, while others may be open to all buyers who meet certain requirements.

Do HFA loans require mortgage insurance?

Depending on the type of loan you get through your HFA, you may owe mortgage insurance. But your premium may be lower with an HFA loan than with a regular conventional loan.

How do I find my state's HFA and see if I qualify for a loan?

You can search for your HFA's website online and learn about the programs it offers, who is eligible, and how to apply.