How does a Mortgage Revenue Bond Work?

Mortgage revenue bonds are issued by state and local governments to support Housing Finance Agencies (HFAs). Most states have an HFA that operates separately from federal housing programs. These organizations support the expansion of home ownership on the local level through programs similar to the US Department of Housing and Urban Development's Federal Housing Agency (FHA). Grants, loan guarantees and other financial assistance is granted to qualified home buyers and funded through the Mortgage Revenue Bond program.

Purchasing Mortgage Revenue Bonds

These bonds are not available in every state. Determine if your state offers the options. You can purchase out of state bonds, but the benefits of the bond will not apply to out of state buyers. This occurs because the main incentive to purchase these bonds is the fact they are free of state and local taxes. If you purchase an MRB in another state, you will not have any tax exemptions in your home state. If they are available in your state, they can be purchased through your state HFA or State Treasury. You can buy directly from these sources or through your broker. Like most tax-exempt bond options, MRBs are only available up to a certain limit each year. You cannot exceed the individual limits set by your state.

First-Time Homebuyer Programs

The revenue from MRBs goes to support programs for first time home buyers in the area. These buyers are credit worthy but may have low incomes or low liquidity, making it hard for them to qualify for a standard mortgage. Through the state's MRB program, proceeds from bonds can be allocated to provide low interest loans to qualified borrowers. The loan funds will only finance primary residences, and the borrowers will see a moderate mortgage limit smaller than the jumbo loan level. These loans are designed to have a low chance of default, which is why the requirements can be strict.

Interaction with Federal Programs

Borrowers who qualify for assistance through a state's HFA often work with federal assistance programs and lenders. For example, these loans are often provided in conjunction with Fannie Mae or FHA guaranteed loans. Borrowers on these loans qualify for a conventional mortgages. Instead of seeking a high risk loans or sub prime loans, the borrowers can apply for loans through federal and state assistance programs. The more assistance granted to a borrower, the less expensive a mortgage becomes.

Bond Alternatives

These bonds are excellent alternatives to US Treasury bonds, but it can be very favorable to hold both. Since Treasury bonds are exempt from federal taxes and municipal bonds are exempt from local taxes, owning a combination of both forms of bonds can create a very low-tax portfolio. MRBs are good options for investors who would like to protect their principal investment and earn a modest profit throughout the life of the bond. Large profits should not be expected, but consistent returns are guaranteed through the state or local treasury.

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