What Are Housing Bonds?
Let me explain housing bonds directly: they are debt securities, essentially a form of municipal revenue bonds, that state or local governments issue to gather funds for affordable housing development projects. You should know that these bonds help finance the building or renovation of housing that's accessible to lower-income groups.
Understanding Housing Bonds
When governments need capital for projects, they might issue municipal bonds, which come in two main types: general obligation bonds and revenue bonds. General obligation bonds are backed by the government's full faith and credit, potentially allowing tax increases to cover payments. Revenue bonds, on the other hand, rely on the income from the project itself. Housing bonds fall into this revenue category.
As private activity bonds, housing bonds can be issued for qualified developers—both profit and nonprofit—to support low-income multifamily or senior housing. They also provide low-cost mortgage options for low-income families or individuals looking to buy a home. I've seen that over 1.1 million affordable homes have been financed this way using the Housing Credit.
These bonds often need voter approval and can be short- or long-term. The government repays the principal plus interest, with payments coming from mortgage repayments and investment earnings collected by a trustee.
Requirements for Housing Bonds
If you're considering a mortgage through housing bonds, note that they're restricted to first-time homebuyers whose income doesn't exceed the area median. The home price can't go over 90% of the average area purchase price. These bonds usually offer low interest rates, either fixed or as variable-rate demand obligations, with payments to bondholders backed by borrowers' timely mortgage repayments.
Benefits of Housing Bonds
Housing bonds benefit both the issuing government and investors. For the government, they provide access to substantial low-cost financing. For you as an investor, especially if you're in a high tax bracket, the tax advantages are significant—the interest is exempt from federal income tax and sometimes state tax too.
This exemption is particularly valuable if your marginal tax rate is high, though those under alternative minimum tax might still owe something. It offsets the bonds' lower interest rates. Additionally, federal low-income housing tax credits can supplement or replace housing bonds for financing, offering nonrefundable credits on part of the mortgage interest for qualified buyers.
Key Takeaways
- Housing bonds are debt securities issued by governments to fund affordable housing, providing cheap financing and tax benefits to upper-bracket investors.
- Mortgages from these bonds are for first-time buyers earning up to the area median income, with home prices capped at 90% of the average.
- As revenue bonds, they're backed by mortgage repayments and can include tax credits for added funding.
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