What is an HFA loan?
Nothing crushes the dream of homeownership faster than restrictive lending qualifications. Between all the requirements relating to credit history, income and liquid assets, many people feel boxed out from conventional mortgages.
But the lending industry is filled with loan options that fit a wide variety of income levels, credit scores and financial situations — you just need to know where to look for them.
One of the more unheralded options is an HFA loan. No, that’s not a typo. We’re talking about HFA — not FHA — home loans. An HFA mortgage is yet another way for people to secure the financing needed to buy a home — often with flexible lending terms and lenient application criteria.
Sounds pretty appealing, right? Read on to learn more about HFA loans and what they might be able to do for you as a borrower.
What is an HFA loan?
Let’s back up a second. Before we can get into HFA loans, we have to talk about the HFA itself. HFA stands for Housing Finance Agency, and every state in the union has one. Many larger cities and counties also have their own HFAs. These state-chartered governing bodies work with state governments to deliver affordable housing to more people — in particular, households relying on low-to-moderate income. HFAs are not to be confused with the Federal Housing Finance Agency (FHFA), which serves a more regulatory and supervisory purpose within the mortgage lending environment.
As part of their overarching mission, many HFAs collaborate with state legislators and authorities to create housing programs for people who might otherwise struggle to secure a conventional mortgage. HFAs may also offer FHA, VA and USDA loans. Because each state has its own HFA, those programs may vary significantly depending on where you live. For instance, Illinois residents can take advantage of several mortgage programs offered by the Illinois Housing Development Authority (IHDA). Each program under the IHDA serves up a unique combination of incentives, financing terms, loan options and eligibility qualifications, giving people plenty to consider as they search for the right fit.
Similar to other government loan options, HFA borrowers can only use lenders that are approved by the state’s program. So, if you have a specific mortgage lender in mind, be sure to check that your state’s HFA will work with them.
HFA Advantage vs. HFA Preferred: What you should know
While there are a lot of HFA programs to explore, many homebuyers choose to use HFA loans supported by Fannie Mae (FNMA) and Freddie Mac (FHLMC). At a high-level view, FNMA’s HFA Preferred and FHLMC’s HFA Advantage programs are very similar, as both share the same goal: make homeownership more affordable for a wide swathe of people.
Where these home loans diverge really depends on the specific state-chartered HFA you’re working with. Both programs, for instance, may require the borrower to pay mortgage insurance, but how much and for how long will be determined by the HFA. The same goes for down payment requirements. If you use an HFA Preferred loan, you might only need to use a 3% down payment option, but that’s not set in stone by any means.
Some HFAs will work exclusively with either FNMA or FHLMC, while others will have programs facilitated by both government-sponsored enterprises (GSE). And again, the terms of your home loan could vary significantly in different parts of the country. That being said, however, each HFA is dedicated to supplying affordable housing. Across the board, you should expect HFA loans to offer lenient application qualifications and flexible financing terms.
What are the benefits of HFA loans?
The specific terms of your HFA loan may vary depending on the program you use, but they all offer affordable financing options that stack up nicely against other types of home loans. In particular, you can expect to enjoy these perks when you buy a house through an HFA program:
- Low down payment requirements — sometimes options no more than 3% of the purchase price
- Low mortgage insurance premiums, which can be removed as you gain more equity
- Financial assistance options to help you make your down payment
Those financial benefits can be tough to ignore if you want to become a homeowner but worry about saving up enough money to put toward a large — or even moderate — down payment.
How do you qualify for HFA loans?
Despite all the variance you’ll find with different HFA loan programs, some aspects will stay roughly the same. That includes borrower qualifications. Regardless of what state you live in or what HFA program you use, you’ll probably need to meet these qualifications to be eligible for mortgage assistance:
- The home must be your primary residence.
- The property must be a single-family house, condo unit or planned urban development.
- Your prospective loan must have first-lien position on the property. That is, there are no other ownership claims that might supersede your mortgage lender.
- Your fixed rate mortgage cannot run longer than 30 years.
- The loan must only be used for the purchase of a home. You cannot use HFA programs to take advantage of cash-out refinance services.
You may have noticed we didn’t mention anything about finances or credit history. That’s because those qualifications fluctuate too much to unequivocally say what benchmarks you need to meet for all HFA loans. If you’re thinking of using Freddie Mac’s HFA Advantage or Fannie Mae’s HFA Preferred program, though, you should know that the GSE accepts applications with loan-to-value ratio options as high as 97%.
What types of home loans are supported by HFA programs?
Whether your HFA loan goes through Freddie Mac or Fannie Mae, you’ll likely be limited to conventional fixed rate loan options, like a 30-year fixed rate mortgage. Adjustable rate mortgages are almost certainly not going to be an option. As we noted earlier, HFAs may offer FHA, VA or USDA loans, but that varies from program to program. You really need to do your research and speak with a qualified lending professional to decide which approach is the best suited for your situation.
FHA vs. HFA loans: What's the difference?
Because so many people confuse HFA loans with FHA mortgages, it’s important we clear the air. HFAs are state-chartered government bodies that act as investors to supply liquidity and funding for a broad range of borrowers. That includes both helping people secure a home loan as well as providing financial assistance with the down payment. HFAs can offer a wide variety of loan options, including FHA loans. Both types of programs tend to focus on first-time homebuyers and borrowers who will require mortgage insurance to get a lender to sign off on the home loan.
As you can see, there’s plenty to like with both FHA and HFA loans. Picking between the two may feel like splitting hairs, but often the decision comes down to your choice in mortgage lender. If your lender offers FHA mortgages but not HFA loans, then your choice is pretty easy.
HFA programs help make it possible for more people to afford buying a house. You can find a dedicated House Finance Agency in every state in the nation, each one with its own loan options and eligibility standards. Even so, you can expect your local HFA to offer pretty enticing financing terms, including some of the lowest down payment requirements you’ll likely find anywhere.
With HFA loans, prospective homeowners have another lending option to keep in your back pocket — especially if you’re looking for lenient loan approval processes. If you ever find yourself feeling discouraged by your homeownership prospects, remember to keep your head up. There are a variety of loan options out there to explore, and you shouldn’t count yourself out until you’ve talked to a lender and learned what’s available.
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