Below-Market Interest Rate (BMIR) Definition

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 given under BMIR terms involve an interest rate below the applicable federal rate or may even involve no interest rate.

A BMIR applies to a particular loan or borrower—such as low-income or military veteran homebuyers—and does not describe a general low-interest-rate environment. Several programs, many sponsored by the U.S. government, exist to enable lenders to offer a BMIR.

Understanding a Below-Market Interest Rate (BMIR)

Below-market interest rates (BMIRs) 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 lower interest rates than prevailing market rates. Many cities have programs in effect that extend BMIR loans to individuals with limited incomes, for either buying a home or making home improvements.

The interest rate for BMIR programs is significantly below prevailing market interest rates and can be as low as 0 percent in some cases. The actual interest rate depends on 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.

Examples of BMIR Loans

Housing and Urban Development

The U.S. Department of Housing and Urban Development (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, identifying documents for all people in the household, and other information related to household income and assets. After obtaining approval for program participation, residents must agree to provide current information at predetermined intervals so that their continued eligibility can be confirmed and applicable departments can be alerted 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. Another later replaced that program, and HUD introduced several subsequent replacements and updates since then.

In 1988, the Arkansas Development Finance Authority purchased about 300 of HUD’s BMIR multifamily 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.

Corporate Loans

BMIR loans were once an attractive employment benefit for high-level executives, allowing them to borrow money from their employer at a favorable rate. This practice has declined due to tax reforms, but it is still common for shareholders to borrow money from closely held corporations at below-market rates. In both cases, borrowers should be careful to pay taxes on imputed interest.

Gift Loans

BMIR loans are often given informally between friends or family members. In these cases, the lower interest rate is considered to be in the nature of a gift, with similar tax implications. If the total outstanding debt between two individuals is more significant than $10,000, then the difference between the two interest rates is taxed as imputed interest.

What Programs Offer BMIR Loans?

State housing authority programs can offer BMIR loans to eligible homebuyers. For example, the Connecticut Housing Finance Authority (CHFA) helps homebuyers to obtain both government-insured and non-government-insured loans with interest rates below market rates. Borrowers must qualify for a mortgage loan with a CHFA-approved lender to take advantage of discounted rates.

If you’re interested in getting a BMIR loan, your local housing authority can be a good place to start. Your housing authority may be able to help you find BMIR loans or secure other types of home-buying help, such as down payment assistance or closing cost assistance.

The type of government-backed loan for which you’re eligible can depend on your income, credit scores, military affiliation, and where you live. Federal mortgage programs that typically offer below-market interest rates include:

• Federal Housing Administration (FHA) loans
• U.S. Department of Agriculture (USDA) loans
• U.S. Department of Veterans Affairs (VA) loans
• Fannie Mae

FHA loans are designed for borrowers with lower credit scores and/or those who can only afford to make a smaller down payment. USDA loans are designed for borrowers who live in rural areas, and VA loans are used by military members.

BMIR Qualifying Criteria

Qualifying criteria for BMIR loans can depend on the type of loan involved. As mentioned, landlords who are able to offer rental housing using BMIR loans may use household income and family size to determine eligibility for HUD Section 8 housing subsidies. But if you’re applying for a BMIR loan through a government program, such as the FHA or the USDA, then your ability to qualify is typically based on things like:

• Credit scores
• Annual income
• Assets
• Debt-to-income (DTI) ratio

With either type of scenario, qualification revolves around proving your ability to repay a loan.

Special Considerations

BMIR loans may be treated as a taxable event by the Internal Revenue Service (IRS). According to U.S. Code 7872, if a gift or demand loan is given with a BMIR, then the foregone interest is treated as imputed interest. The difference is taxed as if the lender had transferred an equivalent cash value to the borrower on the loan date. That money is then considered to have been retransferred from the borrower to the lender as interest.