Housing Bond

What Is a Housing Bond?

A housing bond is a loan from investors to a government or public agency, repaid with interest over time, where the money raised goes to housing. Because interest on most state and local bonds is exempt from federal income tax, investors accept lower interest rates. Those savings can be passed on as cheaper mortgages and construction loans.

The term covers two quite different tools.

How Housing Bonds Work

Private activity bonds

State housing finance agencies and some local issuers sell tax-exempt private activity bonds and lend the proceeds to privately owned projects. Two kinds dominate:

• Multifamily housing bonds finance apartment construction or rehabilitation. Under Section 142(d) of the tax code, a project must keep at least 20% of units for households at or below 50% of area median income, or at least 40% at or below 60%, for a “qualified project period” of at least 15 years.
• Mortgage revenue bonds fund below-market home loans. Under Section 143, nearly all proceeds must go to buyers who have not owned a home in the past three years, with caps on buyer income (generally 115% of area or state median family income) and on purchase price (generally 90% of the area’s average).

Each state may issue only a limited amount of these bonds each year, a “volume cap” set by a per-person formula adjusted for inflation, with a minimum for small states. Housing competes with other eligible uses for that cap.

General obligation bonds

Cities, counties, and states can also ask voters to approve general obligation (GO) bonds for housing. These are backed by the government’s taxing power rather than by project income. The money often seeds a housing trust fund, fills financing gaps in tax-credit deals, buys land, or preserves existing affordable homes. They often require approval by a majority of voters, and some places require a supermajority.

Housing Bonds and the 4% Tax Credit

A building financed in large enough part with tax-exempt private activity bonds can claim the 4% Low-Income Housing Tax Credit without competing for a state’s limited 9% credits. Historically, bonds had to finance at least 50% of the cost of the building and land, a rule known as the 50% test. Public Law 119-21, enacted in 2025, lowered the threshold to 25% for buildings placed in service in tax years beginning after 2025, as long as bonds issued after December 31, 2025, cover at least 5% of that cost. The lower threshold lets a limited bond cap support tax credits for more buildings.

Why It Matters for Workforce Housing

The federal income test for multifamily bonds tops out at 60% of AMI, so the restricted apartments they finance mostly serve lower-income renters. Mortgage revenue bonds reach further up the income scale, to buyers at roughly 115% of median income. Locally approved GO bonds are the most flexible. A community sets the income targets itself and can include households earning more than the federal limits. That makes GO bonds one of the few bond tools that can reach renters in the workforce housing income band.