A Graduated Payment Mortgage or GPM is a type of fixed-rate mortgage for which the payment increases gradually from the initial low base level to the higher final level. The purpose of a Graduated Payment Mortgage (GPM) is to allow homeowners to start off with lower monthly mortgage payments to help certain people qualify for their loans. The Graduated Payment Mortgage is a home loan where payments initially start lower but gradually increase over time. The Graduated Payment Mortgage (GPM) is meant for people who are not able to afford large monthly payments right away but will be able to in the future.
A Graduated Payment Mortgage is a type of Mortgage loan typically backed by FHA. The GMP loan program also called the FHA 245 (a) Loan is intended for low-to-moderate-income borrowers who expect their income to increase while they have mortgages. The Graduated Payment Mortgage (GPM) is a kind of loan offered through the Federal Housing Administration (FHA) Loan. These Mortgage Loans start with smaller payments than the eligible borrowers would often have during the first year of the Mortgage. After the first year, the payment is structured to grow each year, usually somewhere between 2% and 7.5% for the first few years of the Mortgage Loan.
A Graduated Payment Mortgage is the best option if the borrowers can’t afford payments for the Conventional Mortgage Loans but expect their income to grow next few years. The GPM is offered in 15-year and 30-year amortization and for conforming mortgage and jumbo mortgage loans. The A Graduated Payment Mortgage program normally has five different plans that vary in length of time and rate of increase of nominal interest rate. GPM is a type of FHA Mortgage Loan. There are the following types of FHA Mortgage loans such as FHA 203(b) loan, FHA 203(k) Loan, FHA 203(h) Loans, HECM Loans, EEMs Loans, and GPM or FHA 245(a) Loans.
What Is Graduated Payment Mortgage?
A Graduated Payment Mortgage (GPM) or FHA 245(a) Loan is a type of Mortgage that is designed to start with the homeowners owing minimum payments, then over time the payment amount increases. Most Graduated Payment Mortgage (GPM) Loans are insured by FHA (Federal Housing Administration) and come in 15-year and 30-year varieties. These Mortgage Loans are sometimes referred to as the Section 245 loan. These Mortgage Loans are self-amortizing loans, which means that the borrowers expect the debt to be completely repaid by the end of the loan period. Graduated Payment Mortgage (GPM) is the popular choice for first-time homebuyers depending upon their circumstance and people looking for real estate financing. The Graduated Payment Mortgage (GPM) is only available on loans from FHA Loans. These Mortgages are especially well-suited for those who are unable to make large Down Payments. FHA Mortgage Loans allow eligible borrowers to finance up to 96.5% of the Home’s Value.
How Does Graduated Payment Mortgage (GPM) Work?
The Graduated Payment Mortgage (GPM) or FHA 245 (a) Loan keeps early mortgage payments low by deferring interest. This means that borrowers pay less than the total amount of interest owed in the early months or even years of the Loan. The rate of interest is added to the loan’s principal and is paid off later. In order to qualify for the Graduated Payment Mortgage (GPM) eligible borrowers need to work with an approved HUD lender who can issue these government-backed mortgage loans. Not all lenders can offer this type of mortgage loan and some may not offer it even if they are HUD Approved.
There are five Graduated Payment Mortgage (GPM) plans. The first three have a five-year term and increase every year by 2.5%, 5%, or 7.5%. However, the other two have a ten-year term and increase by either 2% or 3%. The Graduated Payment Mortgage (GPM) may or may not be a negative amortization loan, if the initial payment amount is less than the accruing interest on the Mortgage Loan, the Graduated Payment Mortgage (GPM) is Negative Amortization Loan.
What Are the Benefits of Graduated Payment Mortgage (FHA 245 (a) Loan)?
The Graduated Payment Mortgage (GPM) or FHA 245 (a) Loan offers homeowners some key benefits such as:
- Potentially easier qualification for a mortgage, based upon the income.
- Lower payments initially, with payments that grow as your income does.
- Flexibility with budgeting monthly expenses.
What Are the Eligibility Requirements to Qualify for the Graduated Payment Mortgage?
The Eligibility Requirements for the Graduated Payment Mortgage or FHA 245 (a) loan are same as the most other FHA mortgages. Some of the Eligibility Criteria for Graduated Payment Mortgage are:
- The borrower needs to be a lawful resident of the USA.
- The Borrowers need to have A valid Social Security Number.
- The Borrowers need to adhere to the state age requirement for signing a mortgage
- To qualify for GPM Mortgage the borrowers must have steady employment or source of income for at least two years.
- To qualify for the GPM Loans, borrowers must have a credit score of at least 580. However, borrowers with credit scores between 500 and 579 are still eligible, but a Down Payment of No less than 10% needs to be made.
- The Borrowers need to be able to pay a Down Payment of 3.5% minimum.
- The Borrowers must have a debt-to-income ratio of less than 43%.
- To qualify for the FHA 245 (a) loan, eligible borrowers need to have a clean Credit Alert Verification Reporting System (CAIVRS) report showing no current delinquencies.
- Must intend to use loan proceeds toward a primary residence
- Properties eligible for finance under FHA 245 (a) loan include single-family homes, multi-family homes, manufactured homes, and some health-related facilities.
- To Qualify for the FHA 245 (a) loan, the property must be appraised by an FHA-approved appraiser.
- The property must meet minimum standards of habitability to apply for the FHA 245 (a) loan.
How Are Graduated Payment Mortgage Calculated?
The Graduated Payment Mortgage or FHA 245 (a) Loan is calculated using the mortgage loan amount, interest rate, annual graduation rate, and number of graduations applied. However, the borrowers can use the online calculators, in case they want to know in advance.
Graduated Payment Mortgage (FHA 245 (a) Loan) Reviews
A Graduated Payment Mortgage (GPM) might be worth considering if the borrowers struggling to get approved for conventional mortgage loans. With FHA 245 (a) Loan, homebuyers get access to mortgages with low initial monthly mortgage payments that gradually increase over time. The GPM Program helps families become homeowners, even if they have little income provided they will see an increase in income as time goes by. However, there are many downsides of Graduated Payment Mortgage loans and the primary disadvantage of these Loans is that the total costs associated with the mortgage are higher than those of the traditional mortgage loans. As payments grow to higher interest rates, the borrowers may find they are only paying the interest charges and not reducing the principal borrowed. Here are some of the Pros and Cons of Graduated Payment Mortgage or FHA 245 (a) Loan:
Pros:
- The Graduated Payment Mortgage (GPM) Loans are attractive for young families. This is because a Graduated Payment Mortgage (GPM) provides the opportunity to become homeowners earlier than with some conventional mortgage loans.
- Qualifying for the Home Loan is easier for a Graduated Payment Mortgage (GPM).
- With Graduated Payment Mortgage (GPM), eligible borrowers will be able to purchase their income property much sooner.
- The eligible borrowers will get more homes for their money.
- In Graduated Payment Mortgage (GPM), the lower payments are required initially.
Cons:
- In case the home does not go up, there is an increased risk of financial issues.
- The overall costs are higher in Graduated Payment Mortgage (GPM).
- It can be harder to determine if a Graduated Payment Mortgage (GPM) loan fits the borrower’s budget or if they are getting a good deal.
- The Total costs of a Graduated Payment Mortgage (GPM) often exceed a Conventional Mortgage.
- Negative Amortization is a possibility that can add to the Loan Principal.
Frequently Asked Questions (FAQs)
Question 1: Who should consider a Graduated Payment Mortgage (GPM)?
Answer: A Graduated Payment Mortgage (GPM) is best for someone who expects their income to increase steadily in future years. If the borrowers don’t have a realistic expectation that their income will rise over time, then Graduated Payment Mortgage (GPM) can be problematic as their monthly payments increase.
Question 2: What Are the Risks of Graduated Payment Mortgage (GPM)?
Answer: The Main Risk of a Graduated Payment Mortgage (GPM) is that the borrower’s income might not rise as quickly as predicted. In this case, the borrowers will have increasingly large mortgage payments they are unable to afford.
Question 3: Who is the ideal borrower for a Graduated Payment Mortgage (GPM)?
Answer: The ideal borrower for the Graduated Payment Mortgage (GPM) is someone who may not currently be able to afford large mortgage payments. Instead, this person realistically expects their income to increase over the next 5 to 10 years.
Question 4: Who is eligible for a Graduated Payment Mortgage (GPM)?
Answer: Any person who is able to meet the credit requirements, cash investment, and mortgage payments is eligible to apply for the Graduated Payment Mortgage (GPM). However, this FHA Mortgage Loan program is limited to the owner-occupants.
The Bottom Lines
A Graduated Payment Mortgage (GPM) makes the most sense for eligible borrowers who expect to earn considerably more in the next five to ten years. These types of FHA Mortgage Loans cost more than traditional fixed-rate Mortgages, despite having lower monthly payments upfront, especially if it is negatively amortized. The Graduated Payment Mortgage (GPM) is backed by FHA Loans, so the borrowers have to pay the FHA Mortgage Insurance, added to the overall expense.
