State Bond Loan Programs are tools used by many U.S. states to make buying a home more affordable. These programs are run by state Housing Finance Agencies (HFAs), which raise money by selling tax-exempt bonds to investors. The funds raised are then funneled to approved lenders who offer special mortgage loans with lower interest rates or additional financial assistance to eligible homebuyers.
How Do State Bond Loan Programs Work?
States sell mortgage revenue bonds to investors, creating a pool of funds dedicated to financing home loans. Because these bonds are tax-exempt, the state can offer mortgages with below-market interest rates or provide down payment assistance, making mortgage payments more manageable.
Types of Assistance Offered
- Below-Market Interest Rates: These reduced rates can significantly lower your monthly payments and the total interest paid over a 30-year loan.
- Down Payment Assistance (DPA): Many programs offer a second loan or grant to cover down payments and closing costs. Some DPAs are forgivable if you live in the home for a qualifying period. For more on down payment help, see our Down Payment Assistance Program.
- Mortgage Credit Certificates (MCCs): MCCs provide a federal tax credit for a portion of the mortgage interest you pay annually, reducing your tax bill dollar-for-dollar. Learn more about MCCs on the IRS website here and on our Mortgage Interest Credit page.
Eligibility Criteria
Programs usually target:
- First-time homebuyers, often defined as someone who hasn’t owned a primary residence in the last three years. Find details in our First-Time Homebuyer glossary.
- Buyers meeting income limits adjusted for household size and location.
- Homes that meet program purchase price limits.
- Minimum credit score requirements.
- Completion of a homebuyer education course.
Pros and Cons
| Pros | Cons |
|---|---|
| Saves money through lower interest rates and down payment help. | Additional paperwork and longer approval timelines. |
| Can be combined with FHA, VA, or USDA loans. | Eligibility restrictions can limit who qualifies. |
| Available in almost every state. | Possible “recapture tax” if you sell soon after buying. |
Understanding the Recapture Tax
If you sell your home within nine years, make a profit, and have a substantial income increase, you might owe a recapture tax that partially reclaims benefits you received. This applies only in specific situations and is explained in IRS Form 8828 guidance.
How to Apply
- Visit your state’s Housing Finance Agency website; find your HFA through the National Council of State Housing Agencies Directory.
- Review program requirements and benefits.
- Contact an approved lender listed on the HFA website.
- Begin the loan application and pre-approval.
State Bond Loan Programs are valuable resources for making homeownership attainable. Explore your state’s offerings and see if you qualify to get a head start on buying your home.