What Is the 103a Mortgage Subsidy Bond Program?

The Mortgage Subsidy Bond program is a federal initiative designed to make homeownership more accessible for qualified individuals. Originally authorized under Section 103A of the Internal Revenue Code, the program’s rules are now found in Section 143. The program allows state and local governments to issue tax-exempt bonds, and the proceeds are used to fund mortgages with below-market interest rates. These are not direct loans from the federal government but are originated through participating lenders in partnership with housing authorities.

Borrower and Property Eligibility Requirements

To qualify for a loan financed by a mortgage subsidy bond, both the borrower and the property must meet several requirements established by the Internal Revenue Service. Lenders will verify each of these conditions during the mortgage application process. While the core rules are uniform, specific income and purchase price limits differ by location.

First-Time Homebuyer Requirement

A condition for most borrowers is the first-time homebuyer rule. This means the borrower and their spouse cannot have had an ownership interest in a principal residence at any time during the three-year period ending on the date the mortgage is executed. If there is more than one person on the mortgage, each individual must meet this requirement. This rule ensures the program is targeted toward those trying to enter the housing market rather than existing homeowners.

Income Limitations

A household’s anticipated annual income cannot exceed a specified limit, which is based on the area’s median income (AMI). For households of three or more people, the limit is 115% of the AMI. For individuals and two-person households, the limit is 100% of the AMI. These income caps are published by state and local Housing Finance Agencies (HFAs).

Purchase Price Limitations

The property’s acquisition cost is also limited. The home’s sales price cannot be higher than 90% of the average area purchase price for that location, a rule that applies to both new and existing homes. This is to ensure the program is used for modest housing. Like income limits, these purchase price caps are determined locally and vary by housing market.

Targeted Area Exception

An exception to these rules applies to homes purchased in a federally designated “targeted area,” which are census tracts identified as economically distressed. For properties in these areas, the first-time homebuyer requirement may be waived. The income and purchase price limits are also increased. Income limits are raised to 140% of the AMI for families of three or more and 120% for smaller households, while purchase prices can be up to 110% of the average.

Understanding the Recapture Tax

Receiving a federally subsidized mortgage includes the potential for a recapture tax. This tax is not a penalty but a repayment of the financial benefit received from the lower-interest loan. The tax is a possibility only during the first nine years of ownership. If the home is sold after the nine-year mark, no recapture tax is due.

For the recapture tax to be owed, all three of the following conditions must be met:

• The home is sold or disposed of within the first nine years of closing.
• The homeowner realizes a net profit from the sale.
• The homeowner’s modified adjusted gross income for the year of the sale has increased and exceeds the applicable IRS limit for that year.

If any one of these conditions is not met, no tax is owed. The tax is calculated using IRS Form 8828. The amount owed is the lesser of two figures: 50% of the gain from the sale, or a maximum recapture amount capped at 6.25% of the original loan. This maximum amount is reduced for each year the home is owned, meaning the potential tax decreases over time.

How to Obtain a Mortgage Subsidy Bond Loan

Securing a loan through this program does not involve applying directly to the federal government. Instead, these programs are administered at the state and local levels by Housing Finance Agencies (HFAs).

The first step for a homebuyer is to identify their state or local HFA, which can be found with an online search. The National Council of State Housing Finance Agencies (NCSHA) also provides a directory of these agencies for every state. These organizations serve as the central hub for information on available programs.

Next, find a list of participating mortgage lenders on the HFA’s website. HFAs do not lend money directly but work through a network of approved private banks, credit unions, and mortgage companies. The HFA’s website will provide a list of these approved lenders.

The final stage is the loan application with the chosen lender. The borrower will go through a standard mortgage application and underwriting process, during which the lender confirms all program eligibility requirements.