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Buying your first home is an exciting milestone, but saving up for a down payment can be challenging. If you don’t have much cash on hand, you may look into low down payment mortgage options like HFA and FHA loans. But how do you decide which is right for you?
I compared HFA and FHA loans in-depth to highlight the key differences and help you make an informed choice. Keep reading to learn which type of low down payment mortgage best fits your needs and budget.
What Are HFA and FHA Loans?
First, let’s review what HFA and FHA loans are
HFA loans are mortgages offered by state Housing Finance Agencies (HFAs) in partnership with Fannie Mae and Freddie Mac. They help first-time homebuyers and low- to moderate-income borrowers purchase homes.
FHA loans are government-insured mortgages backed by the Federal Housing Administration. They are offered by private lenders like banks and credit unions. FHA loans assist low- to moderate-income buyers with limited savings.
While both are low down payment options HFA and FHA loans have some important distinctions.
Key Differences
Here are the main differences between HFA and FHA loans:
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Availability: HFA loans are only available through state HFA lenders. FHA loans can be obtained from many national banks, credit unions, and lenders.
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Down payment: HFA loans require 3% down. FHA loans need just 3.5% down.
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Credit score requirements: The minimum credit score is 620 for HFA loans. For FHA loans, you can qualify with a 580 credit score.
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Income limits: HFA loans have local income limits based on family size and location. FHA loans do not have income caps.
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Mortgage insurance: HFA loans use private mortgage insurance that can be canceled at 20% equity. FHA loans have government MIP that is very difficult to remove.
As you can see, FHA loans are more flexible for borrowers with weaker credit or higher incomes. But HFA loans offer slightly lower down payments.
Next, let’s compare some other key loan features.
Loan Features Comparison
| Feature | HFA Loan | FHA Loan |
|---|---|---|
| Interest rates | Varies, often competitive with conventional loans | Typically slightly higher than conventional loans |
| Loan types offered | Conventional | Government-insured |
| Down payment assistance | Often available through HFA | Limited options |
| Seller contributions | Varies by state, up to 6% | Up to 6% allowed |
| Homebuyer education | Usually required | Not required |
| Occupancy requirements | Must be owner-occupied | Can be used for non-owner occupied properties |
| Refinancing options | Limited cash-out refinancing may be allowed | Streamline and cash-out refinancing allowed |
As you can see, HFA loans offer more down payment help and homebuyer education. But FHA loans provide more flexibility for investors and refinancing.
Pros and Cons
Now let’s summarize the main advantages and disadvantages of each type of low down payment mortgage:
HFA Loan Pros
- Low 3% down payment
- Potential down payment/closing cost assistance
- Competitive interest rates
- Lower private mortgage insurance (PMI)
HFA Loan Cons
- Limited availability through state HFAs
- Stricter income and purchase price limits
- Must be owner-occupied
- Minimum 620 credit score
FHA Loan Pros
- Just 3.5% down payment required
- Available from many lenders nationwide
- Minimum 580 credit score
- No income limits
- Allows non-owner occupied properties
FHA Loan Cons
- Government mortgage insurance (MIP) is costly and permanent
- Higher interest rates and upfront fees than conventional loans
- Limited down payment assistance options
As you can see, HFA loans help qualified borrowers who need down payment support, while FHA loans assist those with weaker credit.
Who Is Each Loan Best For?
Given the pros and cons, here are the types of borrowers each loan may be best for:
HFA Loans Are Good For:
- First-time homebuyers
- Buyers who need down payment assistance
- Owner-occupants
- Borrowers with incomes under local limits
- Those with credit scores of 620+
FHA Loans Are Good For:
- First-time buyers with limited savings
- Repeat buyers and investors
- Borrowers with credit scores as low as 580
- Applicants with high debt or income ratios
- Those who need low down payment but have limited assistance options
Talk to a loan officer to get preapproved and see which mortgage you actually qualify for based on your specific situation.
How to Apply
If you think an HFA or FHA loan may be right for you, here are some tips for applying:
For HFA loans:
- Contact your state HFA to learn requirements
- Check available down payment assistance programs
- Get preapproved with an HFA-approved lender
- Complete required homebuyer education course
For FHA loans:
- Research current FHA loan limits in your county
- Compare FHA lenders and get preapproved
- Make sure you meet minimum FHA credit score and debt ratio requirements
- Document all sources of income and assets
The bottom line is that both HFA and FHA loans can be great low down payment options. Think about your budget, credit, and goals to decide which one best fits your homebuying needs and financial situation.
How does an HFA loan work?
HFA loans come with many caveats. You have to meet your state program’s requirements for income and homeownership status (you typically can’t have owned a house within the past three years.) And you’ll probably need to take a homebuyer education course designed to prepare you for the homebuying process.
Once you’re approved, you can often finance the down payment 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 (like HFA Preferred grants), depending on what that particular state authority offers. Often this assistance is only available if you are financing with an HFA loan.
To qualify for one of these mortgages, you generally must meet a few basic HFA loan requirements:
- Down payment: 3 percent for single-family homes
- Credit score: at least 620
- Debt-to-income ratio: 45 percent
- Occupancy requirement: At least one borrower must use the home as a primary residence
Your local HFA may have extra 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.
Pros of HFA loans
- Low down payment requirement and closing costs: With an HFA loan, you can put down as little as 3 percent. 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) ratio. Other programs, like FHA loans, make it harder — if not impossible — to get out of mortgage insurance, as long as the loan is active.
FHA Loan vs. Conventional Loans (Mortgage): The Pros and Cons Before You Choose | NerdWallet
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