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
September 18, 2023 - First-time homebuyers and experienced homebuyers who have never applied for an FHA mortgage may wonder whether they can use an FHA mortgage in certain situations. We examine some of the allowed and disallowed uses for an FHA mortgage in this article.
September 17, 2023 - Credit scores and what it takes to be approved for a mortgage are among the most frequently asked-about topics related to FHA home loans. What does Experian recommend a borrower do to better qualify for an FHA mortgage or any other type of home loan?
September 16, 2023 - Some think the question of buying a home in 2023 is absurd. They look at the high interest rates we see at press time compared to the rates available a year or two ago and wonder why anyone would purchase a home under current conditions.
September 15, 2023 - How much money should a first-time home buyer save for a down payment? It depends on the type of home loan you want, whether you want to avoid mortgage insurance, and whether your FICO scores are high enough to qualify for the lowest down payment.
September 12, 2023 - CBS News MoneyWatch published an article in the last days of August 2023 noting that mortgage rates are hovering in the 7% range, with no real end in sight to the higher interest rates reported at press time. This article lists some of the top ways you can get a lower mortgage rate.
