How Do Bond Loans Work? - SmartAsset

Low- and middle-income families who want to buy homes may be able to get a bond loan. State and local authorities issue bond loans to subsidize the cost of becoming a homeowner for those who meet certain income requirements, either by lowering interest rates or offering cash assistance. Curious about how bond loans work? We’ve got you covered. We can also help you find a financial advisor to work with if you want to improve your finances to secure a conventional mortgage with favorable terms and rates. Consider working with a financial advisor as you evaluate whether a bond loan, or any kind of loan, is a good idea for you.

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What Is a Bond Loan?

Making the jump from renting to buying can be tough if your income isn’t high. But the government doesn’t want homeownership to be something only the rich can achieve. That’s why there are programs in place to make buying a home more accessible to low- and middle-income families. Bond loans comprise one such program.

A state or local government may decide to sell mortgage revenue bonds to raise money for programs that subsidize the cost of buying a home. Mortgage revenue bonds are bonds backed by a mortgage or pool of mortgages. When the homeowners tied to these mortgages make their interest payments, that funds the payments made to mortgage revenue bond investors on a tax-free basis. These perks make mortgage revenue bonds seem attractive and safe to certain investors.

The government uses the money raised from the sale of mortgage revenue bonds to lower the cost of buying a home for community members who otherwise might not be able to afford it. Because they’re partially backed by mortgages, bond loans are also known as mortgage revenue bond loans.

The government can say to a bank or other lender, “Please make x number of home loans available to people with y income, and we will partially back those loans with our government money.” Lenders who might otherwise have declined to offer loans to low- and middle-income applicants will take the government backing as a sign that it’s safe to extend home loans to riskier applicants.

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Getting a Bond Loan

If you want to buy your first home using a bond loan, you don’t go to the local or state government that issued the bond. Instead, you go to a lender like a bank, housing finance authority or affordable housing corporation. Not every low- or middle-income household will be able to get a bond loan. But tens of thousands of Americans have benefited from these loans. In some cases you can go right to a participating bank. In others, you will first have to apply with the state or local housing finance authority that runs the bond loan program.

If there are bond loans available your income qualifies you, you’re likely to get a more favorable (a.k.a. lower) interest rate on your mortgage than you would if you applied for a regular home loan. Bond loans provide partial government backing for mortgages. The point of this is to make lenders more willing to issue home loans to people with low or moderate incomes.

The government support means lenders can offer low interest rates, which helps make a home purchase affordable. In some cases, applicants for bond loans can get both a low interest rate and a chunk of cash to help with a down payment or closing costs.

Bond loans are generally for 30-year fixed-rate mortgages. That means that if you qualify, you will have 30 years to repay your loan. And your interest rate will be low thanks to the government’s help. Income requirements often specify that your household income be no greater than 115% of the area median income, but this rule can vary. In many programs you must be a first-time home-buyer to qualify for a bond loan, but that’s not true everywhere.

Bottom Line

Perhaps you think you’re a candidate for a bond loan. But it’s worth doing a little research to find out if there are bond loan programs in your area. Not every lender participates in bond loan programs. But you should check with your local bank, housing finance authority or affordable housing corporation to see if they do. It’s a good idea to shop around until you find a lender you want to work with. Once you become a homeowner, you’ll be able to build equity in your home and watch your net worth grow.

Tips on Finding Affordable Housing

Perhaps you can’t find a lender participating in a bond loan program with reasonable terms in your area. But you can still benefit from one of many first-time homebuyer programs. Government agencies back many of these programs. Thus, lenders that participate in them would be more likely to offer you a low-interest loan even if your credit score is less than favorable.
The professional guidance of a financial advisor can help you as you go through the entire home-buying process. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.