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
April 8, 2024 - Do experts think mortgage rates will drop during the spring of 2024? Some say no, but that doesn’t mean house hunters should give up hope. Many hang their hopes on the potential that the Fed will cut interest rates in late spring or early summer.
April 7, 2024 - If the home can’t pass the appraisal or if the home can’t be repaired to pass an appraisal, this could result in the lender denying the loan. The same is true if the home is located too close to high voltage power lines, oil or gas drilling operations, or in certain natural disaster hazard zones.
April 6, 2024 - The FHA reverse mortgage is an option for these qualifying applicants that lets the borrower take cash at closing time on a loan that is not due until the borrower dies, sells the home, or stops using it as the primary residence.
April 5, 2024 - FHA mortgages are a good idea for borrowers who want to save money upfront on the mortgage and ideally have FICO scores of 580 or better. Those with FICO scores below 580 should work on credit and other financials before applying for a loan.
April 4, 2024 - Trying to time your commitment to a specific day doesn't make sense when rates dip lower. Why? Because you can’t get an interest rate lock commitment from the lender until you are ready to commit to a specific property you want to buy.
