Bond loan programs are the most commonly misunderstood tool in the DPA toolkit. They are first mortgage programs that offer below-market interest rates, not just down payment assistance layered on top. The rate reduction comes from state HFAs issuing tax-exempt mortgage revenue bonds, with the bond proceeds funding mortgages at rates below prevailing market.
How Bond Programs Work
State housing finance agencies issue tax-exempt mortgage revenue bonds. The bond proceeds fund first mortgages at below-market interest rates. The below-market rate is the primary benefit. DPA in the form of a forgivable or deferred second lien is often layered on top. The originating lender handles the loan process but the HFA provides the funding and sets the program terms. Rates for bond programs typically run 0.25% to 0.75% below the prevailing market rate.
Eligibility Requirements
- ✦First-time homebuyer requirement: must not have owned a primary residence in the prior three years (federal MRB requirement)
- ✦Income limits: set by the state HFA, indexed to AMI; typically 80% to 115% AMI depending on state and program
- ✦Purchase price limits: indexed to area median home price; varies by county
- ✦Primary residence only; minimum occupancy requirements typically apply
- ✦Homebuyer education required by virtually all programs
How MLOs Access Bond Programs
Lenders must be approved originators with the state HFA to offer bond programs. Some HFAs work through a wholesale channel, allowing MLOs to access the programs through an approved lender partner. The process includes a rate lock or reservation system; bond program rates can change as proceeds are deployed. Reserve the rate early; some programs exhaust available bond proceeds mid-year and suspend new reservations until the next bond issuance.
Recapture Tax
Federal MRB rules include a potential recapture tax if the borrower sells within nine years and their income has increased significantly. The maximum recapture is 6.25% of the original principal balance, phased out over nine years. Most borrowers are not subject to recapture in practice, but MLOs must disclose the possibility. The recapture risk diminishes to zero after nine years from closing.
Aria can identify bond loan programs available in a specific state, current rates through the HFA, and how to layer DPA on top for near-zero cash-to-close. Ask at vicariointel.com.
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