Most loan officers can say it takes just 10 to 15 minutes into an initial conversation with a borrower for them to know if they could qualify the borrower for a conventional or FHA (Federal Housing Administration) loan. But what about an HFA loan? The answer to this question may be a bit more nuanced.

Created by state and local governments to finance affordable housing activities, housing finance agencies (HFAs) are public entities that offer first mortgage loan products (often at below-market rates) and down payment assistance (DPA). With few exceptions, HFAs do not originate loans themselves; their correspondent model uses a participating lender network.

While navigating HFA programs available in a specific market may demand a little more of a loan officer’s time, it is time well invested. HFAs’ mission-driven programs can be powerful for lenders serving low- to moderate-income aspiring homebuyers, including first-time homebuyers of color.

Barriers to Homeownership for Households of Color

The homeownership gap between white and Black families in the U.S. was 30% in 2017 compared to 27% in 1960, some eight years prior to passage of the landmark Fair Housing Act in 1968, The Urban Institute reports.

Some of the constraints preventing households of color from buying homes include these findings cited in a recent Freddie Mac report:
  • Access to credit: Differences in credit attributes contribute the most in explaining the racial/ ethnic gap in homeownership transition rates; lenders’ risk appetites may result in overlays that impose additional constraints on underrepresented minority borrowers who are struggling to meet the credit standards for obtaining mortgages.
  • Down payments: Low- and moderate-income homebuyers—particularly those who do not have access to generational wealth—are less likely to have enough emergency savings or reserves designated for a down payment. And by definition, first-time homebuyers do not have proceeds from selling another property for a down payment.
  • Household composition: Aspiring Black homebuyers are more likely to be single than their white peers; being single reduces the probability of transitioning to homeownership.
  • Lack of affordable supply: The inventory shortage is a daunting barrier for all homebuyers today, but especially low- and moderate-income first-time homebuyers.

These findings underscore that it is critical for lenders and loan officers to address racial homeownership gaps by partnering with industry organizations that support homebuyer education and low down payment mortgage programs.

Borrower Advantages Outweigh HFA Program Complexity

Program requirements, processes, systems, and terminology vary among HFAs, which can add to a lender’s workload. However, the scope of borrower benefits is hard to match, especially in the case of prospective homebuyers who lack the generational family wealth to break into the market and sustain homeownership.

They may include:

  • Down payment and closing cost assistance.
  • Competitively priced 30-year fixed rate conventional mortgages with no loan-level pricing adjustments for creditworthy low-income borrowers (specifically, borrowers earning ≤ 80% of the area median income).
  • Minimum mortgage insurance coverage requirements for conventional low-income borrowers, resulting in lower monthly payments.
  • HFA-funded homebuyer education, arming the borrower with knowledge and preparing her/him for the mortgage process and the responsibility of homeownership.
  • Mortgage Credit Certificates, which allow income-eligible first-time homebuyers to claim a dollar‐for‐dollar tax credit for up to $2,000 in mortgage interest paid per year.

Also, HFAs have a demonstrated track record of serving minority borrowers: Almost 30% of state HFA first mortgages were originated for borrowers of color in 2019, according to the National Council of State Housing Agencies. For some agencies—in California, the District of Columbia, Georgia, Louisiana, South Carolina, and Texas—the share exceeded 50%.

HFA-funded homebuyer education and DPA undoubtedly play an important role in paving the way for households of color, as do HFAs’ established role as a trusted advisor and provider of sustainable mortgage financing and extensive relationships with non-profit and faith-based organizations.

Driving Standardization in the HFA Lending Space

Efforts to align HFA requirements to expand affordable mortgage financing with DPA are gaining momentum. Freddie Mac is working on a technology platform intended to assist lenders in evaluating and selecting the optimal affordable mortgage and DPA programs for their low- and moderate-income clients.

Also, a standardized subordinate lien document project is underway that aims to bring a similar level of clarity, efficiency, and confidence that uniform instruments provide first mortgage investors to the legal instruments securing DPA providers’ interests. Other industry participants such as the National Council of State Housing Agencies, the Mortgage Bankers Association and several of those organizations’ members are collaborating on an equally impactful initiative.

This work is not easy, but as the affordable mortgage lending industry contemplates solutions that will spur transformative change, it is essential. We all have a role to play in better serving low- and moderate-income aspiring homeowners, especially households of color. Enhancing HFA lending efficiency and exploring (or augmenting) business opportunities with HFAs may be just two ways in which our industry can play a role, but they will make a difference in the lives of families who may never have presumed to imagine the sense of pride, stability, and hope that comes with owning one’s own home.

Let’s get to work.