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
March 31, 2023 - After you purchase a home with an FHA mortgage, your lender must provide you with information that can help you keep track of your mortgage. Did you know your lender is required by law, with certain exceptions, to provide you with this information?
March 30, 2023 - It’s a common question. What is the total that a participating lender can charge on an FHA loan? There is no single answer if you are looking for a specific dollar amount. Home loan costs vary depending on the housing market, state law, and other variables.
March 28, 2023 - If there are too many eager buyers for a single property, you may find yourself being pressured to go for a no-inspection purchase (always a terrible idea) or to waive other consumer rights in order to close the deal.
March 26, 2023 - Your lender questions should include whether there is an opportunity to buy down your interest rate, how much that rate might be, as well as any discount or perk offered to you for using that lender over another one. It never hurts to ask.
March 24, 2023 - An FHA appraisal, VA appraisal, or conventional mortgage appraisal all work toward the same end. No matter the nature of the loan itself, the appraisal is meant to establish the current fair market value of the home compared to others like it in the area.
