Current clinically used delivery methods for bone morphogenetic proteins (BMPs) are collagen based and require large concentrations that can lead to dangerous side effects. Fibrin hydrogels can serve as osteoinductive bone substitute materials in non-load bearing bone defects in combination with BMPs. Two strategies to even further optimize such a fibrin based system include employing more potent BMP heterodimers and engineering growth factors that can be covalently tethered to and slowly released from a fibrin matrix. Here we present an engineered BMP-2/BMP-7 heterodimer where an N-terminal transglutaminase substrate domain in the BMP-2 portion provides covalent attachment to fibrin together with a central plasmin substrate domain, a cleavage site for local release of the attached BMP-2/BMP-7 heterodimer under the influence of cell-activated plasmin. In vitro and in vivo results revealed that the engineered BMP-2/BMP-7 heterodimer induces significantly more alkaline phosphatase activity in pluripotent cells and bone formation in a rat calvarial model than the engineered BMP-2 homodimer. Therefore, the engineered BMP-2/BMP-7 heterodimer could be used to reduce the amount of BMP needed for clinical effect.