Loans

What Is a Bond Loan?

Mortgage revenue bonds are important financial tools that can help eligible families purchase a primary residence at an affordable price. But what exactly is a bond loan? Increase your financial literacy by learning the specifics of bond loans and how they can benefit you during the home buying process. 

Defining a Bond Loan

Bond loans, or debt securities, are loans issued by corporations, governments, and other organizations to raise money for various projects. When an investor purchases a bond, they have the ability to earn money in turn. 

Bondholders enter legal agreements with bond issuers to pay back the total borrowed money plus interest by the bond’s maturity date. The measure of a bond’s return is known as the bond yield. The yield depends on the bond’s face value and the coupon rate. 

Bonds are known as fixed-income securities because many options guarantee interest payments to the bondholder based on a coupon rate. A coupon is the predetermined interest payment made to the bondholder from the date of issuance to the final payment date. To calculate the coupon rate, add the total coupons and divide the total by the value of the bond loan. 

If you want to be an investor, it’s essential to know about the three major asset classes: bonds, stocks, and cash equivalents. There are different types of bond loans, but the four primary ones are government, municipal, mortgage revenue, and corporate.  

What Is the Difference Between Bonds and Loans?

A bond is a specific type of loan, but it works differently than a traditional loan. The most significant difference is that bonds are tradeable and offer financial flexibility. Investors can trade bonds early or wait to sell them after the maturity date. 

Companies and organizations sell bonds to bondholders when they want to raise money for various financial activities. A bondholder benefits from the purchase of a bond because they receive interest payments monthly, semiannually, or annually. On the other hand, financial institutions provide a traditional loan to a borrower in exchange for interest payments. 

The bond market is a financial market where investors can trade bonds. Similarly to stocks, the price of a bond loan depends on the market. Prices can increase and decrease unexpectedly. On the other hand, the price of a loan is fixed and doesn’t change based on external factors. 

A traditional loan has either fixed or variable interest rates, but it’s possible for a bond to have no interest. A zero coupon bond, also known as a deep discount bond, is a bond loan that does not produce any interest payments. Once a bond’s maturity date arrives, the investor only receives the face value. The benefit of zero coupon bonds is that investors can buy them at a discount price and earn a lump sum. 

What Are Mortgage Revenue Bond Loans?

If you are interested in buying a home, you may be looking into conventional mortgage loans. However, mortgage revenue bonds can provide financial assistance! 

A mortgage revenue bond (MRB) can help prospective homeowners with limited income buy homes, finance home repairs, and get energy-efficient upgrades! Mortgage revenue bonds have helped over 3.3 million lower-income families become first-time home buyers. Since the first revenue bond was issued, approximately 100,000 families receive homeownership assistance yearly. 

State or local governments sell revenue bonds to raise money for programs that support the cost of buying a primary residence. Investors are willing to purchase revenue bonds because they can avoid paying state or local taxes on interest payments.  

When a homeowner makes interest payments on their mortgage loan, investors receive interest payments that are tax exempt. To an investor, a mortgage revenue bond is financially advantageous because they can earn more money than they would with taxable revenue bonds. 

In order to help low and middle-income families afford the cost of purchasing a home, the government can make requests to a financial institution in exchange for government backing. For example, the government can request that the lender make a certain number of mortgage loans available to individuals with a specific income. Lenders typically avoid working with low-income individuals, but government backing makes the lending process significantly less risky. 

State Housing Finance Agencies typically help home buyers obtain a 30-year fixed rate mortgage loan. This type of mortgage provides homebuyers with the max amount of time to pay off the purchase of a home. Fixed rates do not change for the duration of the repayment process, which makes it easier for borrowers to budget and plan payments accordingly. 

What Are State Housing Finance Agencies?

State Housing Finance Agencies (HFAs) are state-chartered authorities that provide funding to increase affordable rental options and homeownership opportunities for residents. 

HFAs administer affordable housing and community development programs that increase mortgage affordability so low and middle-income households can purchase a primary residence. These programs can help prospective homebuyers obtain low-interest rates, low down payments, closing cost assistance, and mortgage tax credit certificates. HFA programs get funding through bonds, the HOME Investment Partnerships Program, and Low-Income Housing Tax Credit (LIHTC) program. 

Some HFAs work directly with the state government. But most HFAs are independent entities that function under the direction of a board of directors. The governor of each state is in charge of appointing board positions. 

Who Qualifies for Mortgage Revenue Bonds?

Suppose you want to apply for mortgage revenue bond loans. In that case, you must be a first-time homebuyer that earns less than the area median income (AMI). If you have a large family, you may make up to 115% of the area’s median income. In addition, the home you wish to purchase must be within a certain value range.

Credit scores are not as crucial for obtaining mortgage revenue bond loans as conventional mortgage loans. If you are struggling to boost your 580 credit score, you could still qualify if your income is below the area median income. 

Not all applicants that meet the income requirements will receive a mortgage revenue bond. Why? There is a cap on the annual issuance of revenue bonds for every state based on population. If the annual cap has been reached, you will be unable to get a revenue bond despite qualifying in one of the top cities for middle-class families

To apply for a mortgage revenue bond, you can contact your state’s Housing Finance Agency or visit a participating bank. You can secure a low-interest rate mortgage if you are eligible for mortgage revenue bonds. In addition, you can get financial assistance with the down payment and closing costs! 

What Is the Affordable Housing Bond Enhancement Act? 

The Affordable Housing Bond Enhancement Act is a bill that aims to increase the supply of affordable houses and improve homeownership access to low and middle-class families. Senator Catherine Cortez Masto (D-NV) and Representative Gwen Moore (D-WI) introduced this bill on June 22, 2022. 

This bill implements numerous changes to mortgage revenue bonds (MRBs) and mortgage credit certificates (MCCs). One of the most critical changes is raising the MRB home improvement loan limit. Are you a homeowner trying to budget money on a low income but struggling to afford necessary home improvements with bad credit? You may consider using loans for bad credit online, but there is a better option! You could secure enough money through a revenue bond for interior and exterior modifications, insulation, heating systems, etc. Inquire with your state’s housing finance agency for more information. 

The Bottom Line

Many people think homeownership is impossible when they have a limited income. But some government programs aim to help low and middle-class families afford the cost of a home. A mortgage revenue bond is a tax-exempt bond that state and local governments issue through HFAs to fund affordable mortgages.

Mortgage revenue bond loans are government-backed loans. Traditionally, financial institutions are unwilling to provide mortgage loans to individuals with limited income. But if the government insures loans, lenders are willing to provide affordable loan terms since the financial risk is much lower. 

A mortgage revenue bond can help you get an affordable mortgage loan with a low-interest rate, low down payment, and low closing costs. Traditional mortgage loans require high credit scores, a 20% down payment, and sufficient income. These strict qualification requirements make it almost impossible for limited-income individuals to purchase a home. 

But to be eligible for a mortgage revenue bond, you must be a first-time homebuyer who earns less than the area median income (AMI). That’s it! If you are ready to become a homeowner and get favorable terms on a mortgage loan, take time to research the bond loan programs in your state. Various lenders participate in bond loan programs, so ask your local bank or housing finance authority.

Homeownership provides more than a permanent place to live. Owning a home increases your net worth and provides stability. Mortgage loan payments are beneficial because they help you obtain equity, which you can use as leverage for future investments. Once you finish paying off your home loan, you gain a valuable asset! 

References:
Bond vs Loan
How Do Bond Loans Work?
Housing Bonds
Products Offered by State Housing Finance Agencies