Key takeaways

• HFA loans are mortgages available solely through state housing finance agencies
• Geared towards first-time and low/moderate income homebuyers, HFA loans feature low down payments, competitive interest rates and down payment/closing cost assistance
• HFA terms and qualifications do vary by state, which may impose income and purchase price limits on borrowers

What is an HFA loan?

Fannie Mae and Freddie Mac, two government-sponsored enterprises (GSEs) that back much of the mortgage market in the U.S., work with state housing authorities (HFAs) around the country to offer these loans. Fannie and Freddie design the loans and their terms, but neither they nor the state directly funds them or deals directly with applicants. Instead, they work through a selection of approved, private mortgage lenders.

Both GSEs offer an HFA mortgage product. With Fannie Mae, it’s called the “HFA Preferred”; Freddie Mac’s version is dubbed “HFA Advantage.” Both are fixed-rate mortgages with a minimum down payment of 3 percent.

That down payment often can be financed with down payment assistance, which is provided through the HFA. The assistance could be in the shape of a second mortgage (with very generous terms), a forgivable loan (that doesn’t need to be repaid in full or in part if you meet certain conditions), or even an outright grant, depending on what that particular state authority offers. Often this assistance is only available if you are financing with an HFA loan.

HFA loan requirements

To be eligible for HFA loans, you generally must meet a few basic requirements.

• Down payment: 3% for single-family homes
• Credit score: at least 620
• Debt-to-income ratio: 45%
• Occupancy requirement: At least one borrower must use the home as a primary residence

Your local HFA may have additional minimums you must meet. Often you need to be within certain income and purchase price limits that vary by county/municipality and household size. And of course, you have to be buying the home within the state.

Types of HFA loans

There are two types of HFA loans: Fannie Mae’s and Freddie Mac’s. Both Fannie’s HFA Preferred and Freddie’s HFA Advantage are conventional, fixed-rate loans with a minimum down payment of 3 percent — lower than the 20 percent typically required by regular mortgages.

They are quite similar in most other ways too, but there are slight differences that you need to keep in mind. Chief among them:

• HFA Preferred: These loans also allow for limited cash-out refinancing.
• HFA Advantage: People who do not plan to live in the home can serve as co-borrowers.

Some states offer both HFA Preferred and HFA Advantage loans; some opt to go with one type exclusively.

HFA vs FHA mortgage loans

An HFA loan and FHA loan might sound the same — and have similar characteristics, like a low down payment — but they are two separate types of mortgages.

In terms of distinctions, let’s start with the sponsoring entity. FHA loans are mortgages guaranteed by the Federal Housing Administration (FHA). A division of the U.S. government (specifically, the Department of Housing and Urban Development), the FHA doesn’t make these loans directly; instead, they’re offered through and funded by private lenders that the agency’s approved.

And they approve a lot of them. FHA loans are widely available from many a mainstream bank, credit union or mortgage company, including online ones — from just about any financial institution that offers mortgages, in fact. In contrast, HFA loans are less common than FHA loans: They’re only available through your state, and from a list of lenders your state has chosen.

Because they don’t require much cash up-front, both loans are popular with first-time homebuyers. But HFA loans are often available only to novices or to those who haven’t owned a home in three years — though this qualification is set by the state HFA, not Fannie or Freddie. HFAs also often limit how much a borrower can make — usually a certain percentage less than the geographic area’s average median income — and how expensive the home purchase can be. FHA loans tend not to have such restrictions.

While their minimum down payment is slightly higher (3.5 percent vs 3 percent), FHA loans also have less strict credit requirements than HFA loans (580 minimum credit score, vs 620). However, that translates into a bit more risk for lenders, which may be why FHA loans have much harder paths out of paying mortgage insurance than HFA loans. HFAs do impose this surcharge but, as with other conventional loans, it’s cancellable once you have built up 20 percent equity in your home. The premiums tend to be lower, too.

Who is an HFA loan best for?

HFA loans are best for first-time buyers or people who haven’t owned a home in the past three years.

If you’re a first-time buyer, you’ll probably be required to take a homebuyer education course to qualify.

It also helps to be of modest means.  To qualify, your income needs to fall within the HFA’s income limits, which are typically set yearly and vary from state to state — and even counties within the state. Those with high incomes should look elsewhere.

The same is true if you’re hoping to buy a purely investment property or a vacation home rather than a principal residence. HFA loans are intended for those buying homes to live in full-time. However, they do allow purchases of two-to-four unit residences, meaning you could finance a duplex, divided townhouse or small apartment building — occupying one unit and renting out the rest.

HFA loan pros and cons

HFA loans are a very useful tool, but they’re not perfect. It’s important to consider the pros and cons before applying.

Pros of HFA loans

• Low down payment requirement/closing costs. With an HFA loan, you can put down as little as 3%. Closing and upfront fees tend to be low.
• Financial assistance. Many HFAs offer assistance with closing costs or down payments.
• Lower mortgage insurance costs/easier insurance elimination. HFA loans charge less for mortgage insurance and eliminate insurance payments automatically upon reaching 80 percent loan-to-value (LTV). Other programs, like FHA loans, make it harder — if not impossible — to get out of mortgage insurance, as long as the loan is active.

Cons of HFA loans

• Not widely available. You can only get an HFA loan from your local state agency. Other types of loans are more widely available.
• Income limits. HFA loans are aimed at people with incomes lower than the median of their geographic area.
• Inconsistent rules. Each HFA can set different rules and requirements, so you need to check with your specific HFA to figure out if you’re eligible.
• Higher credit score requirements. Though low, HFA loans have higher credit score minimums than some alternatives like FHA loans.

How to apply for an HFA loan

1. Explore your HFA’s options. Each HFA has its own requirements for HFA loans, and could also offer alternative programs and assistance. You can find your HFA’s website through Bankrate’s guide to first-time homebuyer programs by state.
2. Contact the state housing authority. Depending on the HFA, you can either fill out a form online to get in touch for more information, or call the agency directly.
3. Find an approved mortgage lender. HFA loans are only offered through lending partners approved by your HFA. You can find a list of these lenders on your HFA’s website. Compare lender reviews and testimonials to help narrow your options. From there, you can move forward with a preapproval and application, and a homebuyer course, if needed. When you apply for an HFA loan, be prepared to hand over all of your financial information, including paystubs and tax returns.

Other low-down payment mortgages

Whether you’re a first-time or repeat homebuyer, there are several other low down payment mortgage options. Some of the most popular include:

• FHA loans: More widely available than HFA loans. Lower credit score requirements. 3.5 percent down payment requirement.
• VA loans: Only available to veterans and service members. No down payment requirement.
• USDA loans: Only available in specific areas. No down payment requirement.
• HomeReady/Home Possible loans: 3-5 percent down payment required. Lower mortgage insurance costs. Income limit of 80 percent of the local area median income.
• Conventional 97 loan: Conventional mortgage with 3 percent down payment requirement.