Graduated Payment Mortgage
The FHA has a particular loan available for low- to moderate-income homebuyers who expect their incomes to increase in upcoming years. The Graduated Payment Mortgage (GPM), also known as HUD's Section 245(a), is a kind of fixed-rate mortgage that starts with lower monthly payments that gradually increase based on a predefined schedule. Typically, the GPM payments increase between 7-12% annually from the initial amount until the full monthly payment amount is reached.
How Does a GPM Work?
It's important to understand how the monthly mortgage payments for a graduated payment mortgage work differently than that of a regular fixed-rate loan. A graduated payment mortgage starts with smaller minimum payments, with the payment amount increasing gradually over time. The low introductory interest rates make it so more borrowers—who might not otherwise qualify—can afford the low initial payments and be eligible for the loan. Different payment plans are available with varying lengths and rate of payment increases, and some include a higher down payment as well.
The FHA offers five different GPM plans to suit borrowers' needs.
- Plan I:
Monthly mortgage payments increase 2.5% each year for 5 years - Plan II:
Monthly mortgage payments increase 5% each year for 5 years - Plan III:
Monthly mortgage payments increase 7.5% each year for 5 years - Plan IV:
Monthly mortgage payments increase 2% each year for 10 years - Plan V:
Monthly mortgage payments increase 3% each year for 10 years
Once the loan reaches the set time period of rate increase, monthly payments remain constant for the remainder of the mortgage term. Keep in mind that borrowers must make higher monthly payments toward the end of the loan as they'll begin to pay down the deferred debt.
Who's it For?
FHA's graduated payment mortgage program is available to finance single-family homes which must serve as the borrower's primary residence. The loan is ideally suited for low- to moderate-income who see their income levels increasing over the coming years. Buyers can tailor the monthly mortgage payments by picking the best plan, giving themselves the means to purchase a home sooner than they would be able to through conventional financing programs. In addition to the payment plans, GPMs come with FHA's flexible eligibility requirements, including low down payments and credit scores.
GPM borrowers should understand 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. While this type of loan is a great way to purchase a home earlier instead of renting, potential borrowers should also be critical and honest when assessing their future income increments and job security.
FHA Loan Articles
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May 8, 2021With a new waiver in place, Dreamers have access to affordable FHA home loans designed for first-time homebuyers. There is no discrepancy in the FHA’s eligibility requirements when it comes to DACA status holders applying for an FHA-backed mortgage. They must meet all the same criteria.
April 30, 2021Buying a house is overwhelming to begin with. Make it a seller’s market, and buyers become even more nervous. Supply of real estate has been low for most of 2021, in part because of the Coronavirus pandemic and the historically low interest rates since 2019.
April 23, 2021No matter what kind of market you’re in, it is always best to get pre-approved before going to shop for houses. The last thing you want is to go look at homes, find the one you love, then have to wait on an approval and lose the dream home to another buyer.
April 11, 2021With the trend of falling interest rates since 2019, the number of mortgage refinances around the country has spiked and continues to rise. Borrowers with FHA loans can also capitalize on the low rates, but it may be possible to simplify the process with the FHA Streamline Refinance.
