Graduated Payment Mortgage
Insurance (Section 245)

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

Purpose:
HUD’s Federal Housing Administration (FHA) administers mortgage insurance programs that help low- and moderate-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 creditworthy borrowers who might not be able to meet conventional underwriting requirements by protecting the lender against loan default. 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 upfront and monthly costs involved in homebuying--to tailor their mortgage payments to their expanding incomes and buy a home sooner than they could with regular financing.

Type of Assistance:
Section 245 insures mortgages for first-time (and other) buyers who have low and moderate incomes--and who thus cannot meet standard mortgage payments--but who expect that their income will increase substantially in the next 5-10 years. Potential homeowners who are considering using a graduated-payment mortgage to purchase a home must remember that their monthly payments to principal and interest will increase each year for up to 10 years, depending on which of five available plans they select.

Three of the five plans permit mortgage payments to increase at a rate of 2.5, 5, or 7.5 percent during the first 5 years of the loan. The other two plans permit payments to increase 2 and 3 percent annually over 10 years. Starting at the sixth year of the 5-year plans and the eleventh-year of the 10-year plans, payments will stay the same for the remaining term of the mortgage. The greater the rate of increase and the longer the period of increase, the lower the mortgage payments in the early years.

Before using this type of financing, would-be homebuyers need to assess their potential for increased income to offset mortgage payment increases. 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.

In most other respects, Section 245 loans are similar to basic FHA-insured single-family mortgage loans. Downpayment requirements can be low--3 percent or less--because FHA insurance allows homebuyers to finance about 97 percent of the home’s cost through their mortgage. 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 with the location and the number of units in the property.

Eligible Grantees:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, can make loans protected by Section 245 insurance.

Eligible Customers:
Anyone who intends to use the mortgaged property as their primary residence and who expects to have a rising income is eligible to apply for Section 245 mortgage insurance. However, the program is not open to investors.