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.
As a first-time homebuyer exploring my financing options, I kept hearing about something called “bond loans.” The name definitely piqued my interest – it sounded almost exotic! But what exactly are bond loans, and could they be a good choice for me? I decided to dig into the details to get the full picture.
What Is A Bond Loan?
A bond loan, also known as a mortgage revenue bond loan, is a specialized type of mortgage issued by state or local governments The goal is to make homebuying more affordable for creditworthy low- to moderate-income borrowers who may not qualify for a conventional bank loan
Local housing agencies provide the bond loans by partnering with approved lenders. When you get a bond loan, the government agency backs your mortgage. This gives lenders confidence to issue mortgages to applicants they may otherwise view as too risky.
Bond loans get their name because the issuing agency raises funds by selling municipal bonds to investors. The agency then uses the money from selling bonds to subsidize mortgage rates.
How Do Bond Loans Work?
While bond loans involve government agencies and bonds borrowers get them through regular lenders like banks or credit unions. Here are some key steps
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You apply and get pre-approved with a participating lender. They confirm you meet eligibility criteria.
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If approved, the lender funds a reduced-rate mortgage backed by the housing agency bonds.
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You make principal and interest payments to the lender as with a normal mortgage.
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The lender forwards bond payments to the agency from your monthly payments.
The housing agency uses those bond payments to repay investors who purchased the bonds that raised the loan funding.
What Are The Benefits For Borrowers?
The main perk of bond loans is getting lower mortgage rates than you could normally qualify for based on credit scores and debt-to-income ratios.
Rates are typically 0.5 to 1.5 percentage points below conventional loans. On a $200,000 loan, that can save you $60 to $250 per month!
In some cases, borrowers may also receive down payment assistance from the housing agency’s pool of bond funds. This helps ease the transition into homeownership.
Bond loans provide fixed interest rates so your monthly payments remain stable. Loan terms are often 30 years.
What Are The Eligibility Requirements?
Each housing agency sets specific limits, but general requirements include:
- Below a certain income threshold based on area median income
- Purchasing a primary residence
- Having reasonable credit history
- Meeting down payment and home price caps
- Meeting debt-to-income ratio requirements
- No ownership interest in other residential property
There may also be first-time homebuyer requirements in some programs.
How Do I Apply For Bond Loan Financing?
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Check if your state or local area offers bond loans. Not all do.
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Contact approved lenders to ask about applying. Often housing agencies maintain lender listings on their websites.
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Complete the lender’s application and provide all required documents to show you meet the program’s eligibility criteria.
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If approved, work with your lender and real estate agent to move forward with buying a home using your bond loan!
Are Bond Loans Right For Me?
Bond loans provide an awesome opportunity to get reduced mortgage rates and make buying your first home more feasible. But make sure to consider:
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Will you meet income limits in your area’s program?
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Are there first-time homebuyer requirements you won’t meet?
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How competitive is the bond loan market where you are? Approval is not guaranteed.
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Can you comfortably handle larger monthly mortgage payments if rates rise in the future?
Discuss bond loan pros and cons with a trusted financial advisor or housing counselor before jumping in. While bond loans make homebuying more accessible for many, weigh all your home financing options before deciding what works best for your situation.
Bond Loans In A Nutshell
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Special mortgages issued by housing agencies and funded through bond sales
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Designed to help creditworthy low/moderate income borrowers
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Feature reduced interest rates/points to improve affordability
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Require borrowers to meet specific eligibility criteria
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Offered through partner lenders like banks and credit unions
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Provide fixed interest rates and 30 year terms
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 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.
Bonds (Corporate Bonds, Municipal Bonds, Government Bonds, etc.) Explained in One Minute
FAQ
How does a loan bond work?
What is the difference between a bank loan and a bond?
What does bonded loan mean?
What is a bonding loan?
What is the difference between term loans and bonds?
The terms of bonds are decided by the company or government that is raising funds. The terms of a loan are decided by negotiations between the borrower and the lender (typically a financial institution). Bonds are rather rigid in terms and quite difficult to revise the terms once issued.
What is bond vs loan?
Loan vs Bond. The difference between Loan and Bond is that a loan finance raising procedure is for individuals and small business entities; whereas the bond is a capital-raising procedure for government, municipal, agencies, and corporate entities.
What is cash for Bond lending?
Cash for bond lending is a type of arrangement that allows an investor to receive a cash loan by pledging all or some of the bond issues currently held in the investment portfolio as security for that loan. The pledge remains in place until the cash loan is repaid in full, meaning that for the life of the loan the borrower cannot sell the bond
Are bond funds riskier than bonds?
While some bonds may be a safer investment than bonds, there are a lot of variables that could affect the relative risks of the two securities. When investing in any type of security, it’s important to consider the unique risks of the investment, the price of the investment, and the broader market conditions.