Understanding Bond Loans

Bond loans, or as they are formally known, mortgage revenue bond loans, are loans that are partially funded by mortgage revenue bonds. They are issued by state and local governments in order to help home buyers with low and moderate incomes buy their first homes. Bond loans are funded through mortgage revenue bonds, which allows the participating lenders to offer lower interest rates than private lenders. In the current real estate climate, this is one of the few ways individuals in lower income brackets can buy homes.

Bond Loans and Mortgage Revenue Bonds Basics

When a person wants to buy a home, she needs to apply for a mortgage to help cover the costs. The mortgage lenders, however, do not want to offer their loans to just anybody. They want to do everything possible to ensure that they will get their money back. That means that they tend to exclude individuals who have lower-than-average income, less-than-ideal credit history or some combination of both. During the latest real estate bubble, those standards were loosened considerably, but once the bubble burst, the fallout forced mortgage lenders to tighten their restrictions again.

Ever since the Great Depression, local, state and federal governments have been working to increase home ownership among the residents in lower income brackets. However, their efforts were hampered by the fact that private lenders were all but unwilling to lend to the people they were trying to help. The issue gained a new urgency when the fallout from the housing crisis left a glut of vacant and foreclosed housing throughout the United States.

Mortgage revenue bond loans were designed to address this problem. They are issued by lenders on behalf of state and local governments, which provide partial financial backing. This financial backing is funded through mortgage revenue bonds. That way, the state and local governments can provide mortgages with more generous terms than what private lenders offer.

Understanding Mortgage Revenue Bonds

Mortgage revenue bonds work similarly to any other government-issued bonds. The state or local government issues the bonds, putting them up for sale to any interested investor. When the investor purchases a bond, he or she gets a guarantee that the money will be returned after a certain period. Until this happens, the investor receives payments equal to whatever interest the bond acquires. The interest payments are not subject to any federal and local taxes.

The funding earned from the sale of the government-issued bonds goes towards certain government programs. In case of mortgage revenue bonds, the funding is pooled together to finance as many bond loans as the issuing government wants. The bonds do not cover the cost of the entire loan, but they cover enough to make it profitable to the participating lenders.

Understanding Bond Loans

The rules and conditions of the bond loans vary between governments, but the basic requirements tend to be largely the same. They are usually for 30-year fixed-rate mortgage loans. This means that a borrower has 30 years to repay the loan and the interest rates will remain the same throughout. Thanks to mortgage revenue bonds, the interest rates are lower than they would be for conventional mortgages of similar value.

In order for someone to qualify for a bond loan, her income must not exceed a certain income limit. That limit is usually no more than 115 percent of her county's median family income. The borrower's credit history must meet the standards set by the Federal Housing Administration. The borrower has to be a first-time homeowner, though some governments reserve the right to waive this requirement under certain circumstances. The home that the borrower is buying must serve as her primary residence. In most cases, the borrower must live within certain areas within a state or locale. These areas tend to have lower-than-average median income and/or a higher-than-average rate of foreclosures.

The bond loans can be purchased from mortgage lenders who agreed to participate in their local mortgage revenue bond loan programs. The lenders are listed on each program's official website.