FHA Graduated Payment Mortgages
Keeping Initial Loan Costs Down
Graduated Payment Mortgages are FHA loans for homebuyers who currently have low to moderate incomes but expect them to increase substantially over the next 5 to 10 years. Through this FHA loan program, also referred to as Section 245, those who have limited incomes are able to purchase a home and make mortgage payments that will grow along with their earning potential.
Those who are considering using a Graduated Payment Mortgage to purchase a home should keep in mind that while their monthly payments to principal and interest will start small, they will increase substantially each year for up to ten years, depending upon the payment plan selected.
How it Works
Through this and other types of FHA loan programs, the lender helps low and moderate-income families purchase homes by keeping the initial costs down. By serving as an umbrella under which lenders have the confidence to extend loans to those who may not meet conventional loan requirements, FHA mortgage insurance allows individuals to qualify who may have been previously denied for a home loan by conventional underwriting guidelines.
It also protects lenders against loan default on mortgages for properties that include manufactured homes, single-family and multifamily properties, and some health-related facilities. Through the Graduated Payment Mortgage program first-time homebuyers and others with limited incomes can tailor their monthly mortgage payments to fit their expanding incomes therefore allowing them to purchase a home sooner than they would be able to through conventional financing programs.
Available Assistance
Of the five FHA Graduated Payment Mortgage plans, three of them allow mortgage payments to increase at a rate of 2.5 percent, 5 percent, or 7.5 percent in the first 5 years of the loan. Through the other two plans, payments increase at a rate of 2 to 3 percent annually over 10 years. Beginning in the sixth year of the 5 year plans and in the eleventh year of the 10 year plans, payments stay the same for the remaining years of the mortgage. FHA mortgages that start with a greater rate of increase over a longer period will have lower payments in the early years.
It is important that while considering this method of financing, homebuyers take the time to critically assess their potential for increased income to offset the rising mortgage payments. They also need to recognize that over the life of the mortgage, they will pay more in interest than they would have had they chosen a mortgage with payments that remained the same over the life of the loan.
Eligibility
Graduated Payment Mortgages are available to anyone who anticipates their earnings to increase substantially and intends to use the mortgaged property as their primary residence.
Application
Any person who is able to meet the credit requirements, cash investment, and mortgage payment is eligible to apply. However, this FHA loan program is limited to owner occupants.
FHA Loan Programs
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FHA Loan Articles and Mortgage News
May 16, 2024 - You’ve saved your down payment funds, researched the housing market, and worked on your credit. When you apply to be pre-approved or prequalified for an FHA mortgage, there are a few things to review before you start filling out the forms.
May 12, 2024 - The FHA and HUD have revised appraisal rules for FHA single-family loans. The revisions are meant to address issues including housing discrimination at the appraisal level, and provide home buyers with clarified guidelines to contest an appraisal or request a reconsideration of value (ROV).
May 11, 2024 - FHA home loans are just one way to buy a home. Some borrowers pay in cash, some use conventional mortgages, and some qualify for VA home loans. But what do all of these have in common in many cases? The need to use home loan earnest money as part of the transaction.
May 10, 2024 - Which services are required for FHA loans, and which ones are optional? Some borrowers ask this in the planning stages because they’re trying to find ways to stretch their home loan budgets for closing costs and the down payment. We examine some critical services in this article.
May 8, 2024 - You cannot make a down payment or pay closing costs with cold, hard cash. You must render payment in the manner acceptable to the lender, which is typically a wire transfer or some other pre-arranged procedure for down payment money.
