Housing bonds are debt securities, a variation of municipal revenue bonds, issued by state or local governments to raise money for affordable housing development projects. These bonds help make housing accessible while providing significant benefits to investors.
Key Takeaways
- Housing bonds are municipal revenue bonds issued to fund affordable housing projects.
- Governments access cheap financing, and investors enjoy substantial tax advantages.
- Mortgages from housing bonds are targeted at first-time homebuyers earning up to the area median income, and are capped at 90% of the average area purchase price.
Understanding Housing Bonds
State and local governments issue housing bonds to finance the construction or rehabilitation of affordable housing. Besides repayment of the bond principal, these governments must also pay interest on the borrowed funds. Voter approval may be required for issuing these bonds, which can be short- or long-term.
Municipal authorities raise capital through bonds to fund projects. The two main types of municipal bonds are general obligation (GO) bonds and revenue bonds. GO bonds are funded from the government’s own financial reserves while revenue bonds are backed by the anticipated revenue from the funded project. A housing bond falls under the revenue bond category.
As private activity bonds (PABs), housing bonds can be issued for qualified profit and nonprofit developers to finance low-income multifamily and senior housing projects. The proceeds may also provide low-cost mortgage financing for low-income families to acquire homes.
Over 1.1 Million Affordable Homes
The number of affordable homes financed with housing bonds utilizing the Housing Credit.
Requirements for Housing Bonds
Mortgages from housing bonds are restricted to first-time homebuyers with earnings no more than the area median income. Moreover, the home price financed through these bonds must not exceed 90% of the average area purchase price.
Housing bonds often have low interest rates and can be structured as fixed or variable-rate demand obligations (VRDO). Bondholders receive principal and interest payments through pledged mortgage repayments and investment earnings. Trustees of the housing bond collect mortgage repayments and invest them short-term until interest payment dates to bondholders, ensuring timely and consistent repayments backed by the underlying mortgages.
Benefits of Housing Bonds
Housing bonds are beneficial to states and private investors. Governments access affordable financing, while investors, particularly those in upper tax brackets, gain valuable tax advantages.
For investors, the interest paid on housing bonds is typically exempt from federal and sometimes state income tax. The higher one’s marginal tax rate, the more rewarding the housing revenue bond’s tax exemption becomes. Even investors subject to the alternative minimum tax (AMT) receive benefits, strengthening the attractiveness of revenue and other municipal bonds.
Federal low-income housing tax credits also provide a financial resource for affordable housing projects in addition to or instead of housing bonds. These credits offer a federal income tax break for qualifying homebuyers on a portion of their mortgage interest each year.
Related Terms: revenue bonds, municipal bonds, tax advantages, low-income housing, fixed-rate mortgages, variable-rate demand obligation.
References
- Office of the Law Revision Council. “26 USC 103: Interest on State and Local Bonds”.
- National Council of State Housing Agencies. “Housing Bonds”.
- National Council of State Housing Agencies. “Tax-Exempt Housing Bonds FAQ”.
