The PHFA K-FIT Loan Program

The PHFA K-FIT Loan Program: A Potential Tool Available for Many First Time Home Buyers in Pennsylvania

When attempting to purchase your first home, there are many obstacles you may face when trying to do so. Two major obstacles include saving up enough to afford a down payment/closing costs, and trying to find a way to afford your monthly payments after you purchase the home. This is especially challenging in the current market we find ourselves in, as both interest rates and property values have increased significantly, pricing out many prospective buyers. Fortunately, in the state of Pennsylvania, the Pennsylvania Housing Finance Agency (PHFA) has created a loan program available for qualifying first time home buyers to help to alleviate closing costs, and to potentially reduce the interest rate associated with the loan. This program is called the “Keystone Forgivable in Ten Years Loan Program,” or K-FIT loan.

When using this loan program, you’ll receive a second position mortgage loan provided to you by PHFA to help supplement your down payment and closing costs. That’s why I oftentimes like to use the word grant when I speak to prospective clients about this loan program, as the “loan” is actually a credit worth 5% of the purchase price. This credit is provided to you directly at the closing table. For example, if you were to purchase a house for $400,000, you’ll be credited $20,000 back to you when you go to close. Important to note with this program, you can put different amounts down, but only put down up to 20% of the purchase price. For example, you can put 3% down using a conventional loan, 3.5% down using an FHA loan, 5% down for a conventional loan and so on and so forth all the way up to 20% down. If you were to elect to put down 3% using a conventional loan, or 3.5% down using an FHA loan, the K-FIT loan will cover the 3-3.5%, and leave you left over with an additional 1.5-2% of the purchase price to put toward your closing costs. If you were to put down 5%, it’ll solely cover your down payment, leaving you responsible still for all closing costs.

Also important to note, this 5% loan is a no interest, no payment loan that is automatically forgiven 10 years after being credited to you. What that means more simply is that you do not have to directly pay it back throughout your time owning the home. In fact, 10% of your loan gets forgiven year over year throughout those 10 years. Using that $20,000 example again, after one year the balance would decrease to $18,000, as $2,000 would be automatically deducted from the original balance. By year five, the balance reduces to $10,000, and so on and so forth until the conclusion of year 10 when your balance would become $0.

When using a K-FIT loan, the interest rate associated with your first position loan (aka your actual mortgage) changes. Though it may increase the rate in very low interest rate environments, currently the rate is often less than the prevailing market rate for conventional loans. For example, toward the end of October to early November of 2023, for an individual with above average credit (>700), a conventional loan had an interest rate somewhere around 8%. For that same individual eligible for a PHFA K-FIT loan, the interest rate associated with the mortgage dropped to somewhere around 7.25-7.5%. Although the rate is always subject to change, it’s important to recognize that this could be a very powerful tool to help you save money each month.

While there are plenty of positives associated with K-FIT loans, I must mention some of the drawbacks associated with this program. The primary drawback has to do with the way in which the loan can be repaid. Although it’s great that you don’t technically have to make any payments on the loan since it automatically gets forgiven, it also means that you cannot sell or refinance the property within that ten-year mark unless you’re able to pay back whatever the current balance is in full.

Referencing that same example again, if you bought your home at $400,000, putting 3% down with a K-FIT credit of $20,000, to pay off your first and second position loans YEAR 1 without bringing additional money to cover the loan, you’d need to sell the home for $408,000 ($388,000 loan balance + $20,000 credit). As it is unlikely that you’d sell your home within the first year of purchasing it, I’ll use the scenario that you decide to sell the home after 5 YEARS. Given 10% is forgiven annually, you’d have a remaining balance of $10,000 in credits originally provided to you. You’d also be chipping away at your principal balance each month as you make your mortgage payments. After 5 years, these principal payments would have reduced your balance to somewhere around $367,500 (don’t believe me, you can search amortization calculator and look at your annual ending balance to determine this number). Adding $10,000 into your current loan balance of 367,500 and you’d have a payoff number of $377,500. This means that you’ll need to sell your home for $377,500 or more to cover both balances. Given that you bought the home for $400,000, your home could decrease in value over time, and you’d still be able to cover the difference. 

If you have no interest in selling your home, but would like to refinance your loan instead, on the surface you may seem to have a similar problem. Fortunately, however, there is also a way around this potential issue. Assuming you’d want to refinance the loan to secure a lower interest rate, when you do go to refinance, you can do something called a “rate and term refinance” to try to secure this lower rate. Rate and term refinances involve changing loan terms and saving on interest while paying off the original loan(s), without physically exchanging any money. This is exactly what you’d want to do if interest rates drop substantially in the future. Lenders will provide up to 95% of the property’s appraised value to perform the refinance, pay off the original loan(s) and refinance into a new singular loan product. You thus can bake in the two existing balances into this newly refinanced loan and effectively remove yourself from dealing with this 10-year rule in the future.

To demonstrate how this could work, I’ll use the same example from above. Let’s say the rates go down substantially enough in 5 years that it now makes sense for you to refinance your loan. Given your current principal balance is $367,500 and your K-FIT balance is $10,000, you’d need to be able to wrap both these values into a new mortgage with a balance of $377,500 to payoff the original loans. Because the lender will allow you to refinance up to 95% of the properties appraised value, if the property appraises at $397,500 (2,500 less than what you purchased the property at), you’d be able to refinance the loan to secure a lower monthly rate, and pay off the two original loans in ful. This will leave you with a singular loan that has both a lower monthly payment and no sale/refinance rules to deal with in the future. 

As you can see, in both scenarios (selling the home and refinancing it) you’d still be able to pay off the loan after only a few years of ownership even if the home decreases in value. It’s exactly for this reason that I often recommend K-FIT loans. Because there are ways to circumnavigate some of the more challenging aspects of this program, it may very well be worth exploring as an option for those that are eligible.

Speaking of eligibility, the other major drawback is exactly that, the eligibility requirements.  The K-FIT loan has a series of requirements you must meet to be eligible to receive this loan when you go to buy a home. The list of requirements is as follows:

• Income (solo or combined if you’re purchasing the property with a significant other/spouse) < $114,400. To note, this number represents net income, not gross income.
• You must have a credit score > 660 for FHA loans, and USUALLY > 700 for conventional loans
• You must have less than $50,000 in liquid assets (basically, you need to have less than $50,000 in cash in your accounts)
• Must be purchasing using a Conventional, FHA, VA or RD loan
• Must be purchasing your FIRST HOME AS A PRIMARY RESIDENCE
• Cannot put down more than 20%

What’s most important to note amongst these eligibility requirements are the income and credit limits. Although the minimum requirement is a credit score of 660, this is only associated with FHA loans. If you are getting a conventional loan, you’ll typically need a credit score >700. This is different than minimum credit requirements for FHA/conventional loans w/out using a K-FIT loan. For standard FHA loans, the minimum requirement is a 580, and for conventional loans the minimum requirement is a 620.

Also, for income limitations, it’s important to recognize that this number is based on your total net income, not gross income. Especially for those that may own a small business, being able to utilize tax deductions to reduce your income amount off your gross income could help you to be eligible for the loan if you find yourself teetering around that $114,000 number. If you are buying the property with a significant other/spouse, it does also apply for your total combined income. If you both combine to make more than this and are both going on the loan, you will be ineligible for the loan.

What I will mention as an aside…if you/you and your spouse are still interested in a loan/grant like this and make more than $114,400 but less than $196,200 per year, you’d be eligible for what’s called a K-FLEX loan. This loan is very similar to the K-FIT loan in terms of the way it works, and the requirements associated with it, but the interest rate is usually well above the going market rate. For this reason I find that this loan isn’t often as desirable for people, so I won’t discuss it at length. If you can, I’d recommend sticking with the K-FIT loan.

Although the K-FIT loan may be challenging to be eligible for, if you are eligible, I strongly recommend exploring this option to help supplement costs associated with buying your first home. My reason for feeling this way is simple: you keep a significant amount of money in your pocket when you go to purchase your home. In fact, it’s entirely possible that if you were to use a K-FIT loan and get some money back in the form of sellers assist, you could purchase a home with no money out of pocket at all. This is possible because of the fact that while sellers assist money can only actually cover closing costs, not your down payment, the K-FIT loan can cover your down payment. If you combine the two, this gives you the opportunity to effectively go to the closing table bringing nothing at all. For example, for those using an FHA loan, you can get up to 6% of the purchase price back in sellers assist money, and you can put down only 3.5% of the purchase price. The grant will cover the 3.5% and then some, and the 6% in sellers assist should take care of things like transfer tax, title insurance, appraisal fees, etc. covering your total costs. If you combine this with the fact that at times the interest rate is below the going market and, to me, using this program is almost a no brainer.

Of course, I will mention that each buyer’s situation is different. You may feel uncomfortable knowing that there is a second position loan attached to your home, or you may feel uncomfortable trying to navigate the 10-year rule I mentioned previously. For that reason, I strongly encourage you to analyze your finances and your overall level of ability to purchase a home to see if this program is an option for you. If it is, it could just be exactly what you need to allow you to purchase your first home!