Special Mortgage Loan Programs

The federal government, through the Community Reinvestment Act, has mandated that lenders make loan programs available to aid low- and moderate-income families, as well as first-time buyers, in purchasing homes. As a result, many lenders will offer at least one of these types of programs. In this article we'll examine the loan program administered by local mortgage revenue bond authorities.

The federal government has granted state and local authorities the power to issue tax-free mortgage revenue bonds, the proceeds of which are used to make low-interest mortgages to first-time homebuyers with lower incomes. Because the bonds are tax-free, they carry a lower interest rate, which subsequently allows the issuing authority to offer lower rates on its mortgages. These loans are subject to a multitude of rules, based on the federal laws which govern them. The basic guidelines are these: although there are no mandated maximum loan amounts, the sale price that a buyer can pay for a property is subject to limitation. Also, the borrower cannot earn a gross income over specified limits. The home must be a single-family residence and occupied by the borrower. And, the property cannot be used in any way to earn income, either by rent or by running a business from the property (including a home-based business). The income and sales price limits vary by geographic location, based on the earnings and housing expenses of a Standard Metropolitan Statistical Area (SMSA). The IRS updates this data yearly.

The authority given by Congress to issue these bonds has time limits. Whenever the authorization nears its current expiration, Congress must once again extend it. If it doesn't, the revenue bond authorities cannot issue new bonds, thereby taking away one more avenue for low- to moderate-income borrowers to purchase a home.

Each state has its own Authority which administers the loan program. The prospective borrower applies for funding directly to a participating mortgage lender, who processes the application and submits it to the Authority. Typically, the lender will receive a 1% origination fee and the servicing rights to the loan. The Authority is paid the discount points.

As stated previously, the borrower must generally be a first-time homebuyer, or not have owned a residence for the previous three years. There are exceptions to this rule, however, which normally occur within certain targeted areas. The borrower's total personal net assets are also restricted, the object of the program being to help those with limited means. In line with that goal, these loans offer liberal qualifying based on several different loan types. The most basic is the conventional loan with a minimum of 5% down and mortgage insurance required, though some packages now offer as little as 3% or even no down payment. Another option is an Authority-issued loan that's FHA-insured. With this loan package, the income and sales price limits are still set by the Authority, but the qualifying and cash down requirements are the same as those of a standard FHA loan.

If the borrower has sufficient entitlement, he or she could also get a loan guaranteed by the VA. As with the FHA loan, the qualifying and down payment requirements are according to VA standards, but the Authority's income and sales price limits must be met. The loan and financed VA funding fee cannot exceed the maximum sales price mandated for the area.

In Part 2 of this article series we'll look at the Rural Development Guaranteed Housing program, which also participates in guaranteeing revenue bond mortgages.