What Is a Below-Market Interest Rate (BMIR)?

A below-market interest rate (BMIR) is a rate that is below the prevailing commercial bank interest rate in effect at that time. Loans that are given under BMIR terms involve an interest rate below the applicable federal rate, or may even involve no interest rate at all.

A below-market interest rate applies to a particular loan or borrower – such as low-income or military veteran home buyers – and does not describe a general low interest rate environment. Several programs exist, many sponsored by the government, to enable BMIR programs to exist.

The Basics of a Below-Market Interest Rate

Below-market interest rates (BMIR) often refer to a certain category of loans or programs that involve low-interest loans used to purchase or maintain properties that will be rented to individuals who meet specific eligibility criteria. Some housing-related programs offer loans to qualified applicants at interest rates that are lower than prevailing market rates. Many cities have programs in effect that extend below-market interest rate loans to individuals with limited incomes, either for buying a home or for making home improvements.

The interest rate for BMIR programs is significantly below prevailing market interest rates and can be as low as zero percent in some cases. The actual interest rate depends on factors such as the cost of credit, the homeowner's creditworthiness, the loan amount and the term of the loan. BMIR also allows owners of government-subsidized housing to pass the savings onto tenants by offering lower rent.

Real World Example of Below-Market Interest Rate Programs: HUD

The U.S. Department of Housing and Urban Development, or HUD, has a BMIR-based rental program for HUD-assisted residents. These programs aim to expand the supply of affordable housing in areas where this is needed, especially in urban centers.

For these programs, residents or applicants must typically provide certain documentation to prove eligibility. This documentation would include proof of income, credit history, identifying documents for all people in the household and other information related to household income and expenses. After obtaining approval for program participation, residents must agree to provide current information at predetermined intervals so their continued eligibility can be confirmed, and to alert the applicable departments of any changes in their circumstances that may affect their eligibility to remain in the program.

The origins of HUD’s BMIR program can be traced back to the National Housing Act of 1959, specifically Section 221(d)(3) BMIR. This insured low-interest loans to private developers for the construction of affordable housing. That program was later replaced by another, and HUD introduced several subsequent replacements and updates since then.

In 1988, the Arkansas Development Finance Authority purchased about 300 of HUD’s BMIR multi-family housing mortgage loans, with the objective of preserving thousands of low-income housing units. This represents one of the first large projects in HUD's BMIR program as it currently exists.