FHA Graduated Payment Mortgage Loan Program

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Section 245 enables a limited income household whose income is expected to rise, buy a home sooner by making mortgage payments that start small and increase over time gradually.


By lowering some of the initial costs of getting mortgage loans, HUD's Federal Housing Administration (FHA) administers mortgage insurance programs that help moderate and low income families become homeowners. By protecting the lender against loan default, FHA mortgage insurance encourages lenders to make loans to otherwise credit worthy borrowers who might not be able to meet underwriting requirements that are conventional. Section 245 contributes to these goals by helping first-time buyers and others with limited incomes--particularly young families, who expect their income to rise but may not yet be able to handle all of the monthly and upfront costs involved in home buying--to buy a home sooner than they could with regular financing and tailor their mortgage payments to their expanding incomes.

Section 245 insures mortgages for first-time (and other) buyers who have moderate and low incomes--and who thus cannot meet standard mortgage payments--but who expect that their income will increase substantially in the next five to ten years. Depending on which of five available plans potential homeowners select, those who are considering using a graduated-payment mortgage to purchase a home must remember that their monthly payments to interest and principal will increase each year for up to ten years.

During the first five years of the loan, three of the five plans permit mortgage payments to increase at a rate of two and a half percent, five percent, or seven and a half percent. The other two plans permit payments to increase two and three percent annually over ten years. Starting at the eleventh-year of the ten-year plans and the sixth year of the five year plans, payments will stay the same for the remaining term of the mortgage. The longer the period of increase and the greater the rate of increase, the lower the mortgage payments in the early years.

Would-be home buyers need to assess their potential for increased income to offset mortgage payment increases, before using this type of financing. Also, they need to be aware that over the life of the mortgage they will pay more interest than if they had a mortgage with payments that stayed the same.

Section 245 loans, in most other respects, are similar to basic FHA-insured single-family mortgage loans. Because FHA insurance allows home buyers to finance about ninety-seven percent of the home's cost through their mortgage, down payment requirements can be as low as three percent or less. In addition, some closing costs can be financed, reducing up-front costs. FHA also limits some fees that lenders charge--for example, the loan origination charge. Finally, FHA sets limits on the size of the mortgage loan that vary the number of units in the property and with the location of the property.

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