This guide, created by the U.S. Department of Housing and Urban Development, explains mortgage options, fees, payments, insurance programs and other helpful information on government-sponsored home ownership programs.
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The loan may be used to purchase a home and the land on which it is located and rehabilitate it; purchase a home on one site and move it onto a new foundation at another site and rehabilitate it; or refinance an existing mortgage to rehabilitate the home. In addition, a Section 203(k) mortgage may be used to convert non-residential buildings to residential use or to change the number of family units in the home. Condominium and cooperative units are not eligible for Section 203(k) mortgages.
The maximum allowable mortgage for a 203(k) loan is the lesser of: • The estimate of the as-is value or the purchase price of the property before rehabilitation, which ever is less, plus the estimated cost of rehabilitation and allowable closing costs, or • 110 percent of the expected market value of the property upon completion of the work, plus allowable closing costs.
Money can be escrowed to help you make mortgage payments during the rehabilitation work. In determining the maximum mortgage amount, this Mortgage Payment Reserve is considered a part of the cost of rehabilitation.
Section 245(a) Graduated Payment Mortgage. The Graduated Payment Mortgage (GPM) Program allows you to make lower payments during the early years of the loan. As your income increases, your payments gradually increase for several years, then level off and remain steady for the balance of the mortgage.
With a GPM, you in effect borrow additional money during the early years of your mortgage by deferring interest payments. This allows you to have smaller initial monthly payments. The deferred interest is added to the loan balance in later years.
FHA offers five GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years. For example:
GPM Plan
Increase in Monthly Payments
Frequency of Increase
Plan 1
2.5 percent
First 5 years
Plan 2
5 percent
First 5 years
Plan 3
7.5 percent
First 5 years
Plan 4
2 percent
First 10 years
Plan 5
3 percent
First 10 years
To give you an idea of how a 245(a) GPM works, the following table compares the monthly payment schedule of a 203(b) FHA-insured loan with Plan 3, the most frequently used GPM plan. In Plan 3, payments increase 7.5 percent each year for 5 years before leveling off. The example uses a 30-year, $60,000 mortgage, with an interest rate of 10 percent:
Year
203(b)
GPM Loan
1
526.80
400.22
2
526.80
430.24
3
526.80
462.50
4
526.80
497.20
5
526.80
534.49
6
526.80
574.57
Remaining Payments
526.80
574.57
Section 245(a) Growing Equity Mortgage. A Growing Equity Mortgage (GEM) is a graduated payment mortgage that provides for rapid principal payment and a shorter mortgage term by increasing payments over a period of time.
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