FHA Growing Equity Mortgage Loan Program

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Section 245(a) enables a limited income household that expects their income to rise to buy a home sooner by making mortgage payments that increase gradually over time but will start small. The increased payments are applied to reduce the principal owed on the mortgage and thus shorten the term of the mortgage.


Federal Housing Administration (FHA) administers mortgage insurance programs that enable moderate and low income families become homeowners by lowering some of the initial costs of their mortgage loans. FHA mortgage insurance also encourages lenders to make loans to otherwise credit worthy projects and borrowers that might not be able to meet underwriting requirements that are conventional, protecting the lender against loan default on mortgages for properties that meet certain minimum requirements--including single-family, manufactured homes, some health-related facilities, and multifamily properties.

Like HUD's Graduated Payment Mortgage Insurance (Section 245), Particularly helping young families, Section 245(a) contributes to these goals by helping first-time buyers and others with limited incomes who expect their income to rise but may not yet be able to handle all of the upfront costs and monthly costs involved in home buying--to tailor their mortgage payments to their expanding incomes and to buy a home sooner than they could with regular financing. However, this program, adds an innovative twist to this basic product: growing equity mortgages (GEMs) enable the homeowner to apply scheduled increases in monthly payments to the outstanding principal balance of their mortgage and thereby to considerably shorten the term of the mortgage. This faster repayment of principal and the reduced term make GEMs more attractive to investors and lenders than other fixed-rate investments.

Under Section 203(b), GEMs are eligible for insurance for one to four-family homes, Section 203(k) for home refinancing or purchase and rehabilitation, Section 234(c) for units in condominiums, and Section 203(n) for shares in cooperatives housing. With certain exceptions, GEMs must meet all the requirements of the section under which they are being insured.

There are five GEM plans. Each plan provides for the monthly payments to be increased by a fixed percentage during each year of the loan. For the initial year, the monthly payments to interest and principal are based on a thirty year level-payment schedule. Thereafter, depending upon the plan selected, the amount of the monthly payments due for the next twelve months will increase each year by between one percent and five percent. Depending on the interest rate and the GEM plan used, the actual term of the mortgage will not be more than twenty-two years and may be less. HUD is considering eliminating GEM and removing its regulations as part of its effort to terminate and streamline obsolete programs.

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