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FHA GROWING EQUITY MORTGAGES
Section 245(a) 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. The increased payments are applied to reduce the principal owed on the
mortgage and thus shorten the mortgage term.
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 and projects that might not be able to
meet conventional underwriting requirements, protecting the lender against loan
default on mortgages for properties that meet certain minimum requirements --
including manufactured homes, single-family and multifamily properties, and s
ome health-related facilities.
Like HUD's Graduated Payment Mortgage Insurance (Section 245), Section 245(a)
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. 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
reduced term and the faster repayment of principal make GEMs more attractive to
lenders and investors than other fixed-rate investments.
Type of Assistance:
GEMs are eligible for insurance under Section 203(b) for one- to four-family
homes, Section 203(k) for home purchase or refinancing and rehabilitation,
Section 203(n) for shares in cooperatives housing, and Section 234(c) for
units in condominiums. GEMs must meet all the requirements of the section under
which they are being insured, with certain exceptions.
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 principal and interest are based on a 30-year
level-payment schedule. Thereafter, the amount of the monthly payments due
for the next 12 months will increase each year by between 1 percent and 5
percent, depending upon the plan selected. The actual term of the mortgage
will not be more than 22 years and may be less, depending on the GEM plan used
and the interest rate. As part of its effort to streamline and terminate
obsolete programs, HUD is considering eliminating GEM and removing its regulations.
Eligible Customers:
Anyone who intends to use the mortgaged property as their primary residence and who
expects to see their income rise appreciably in the future is eligible to apply for
Section 245 mortgage insurance.
Application:
Applications can be made through FHALoan.com. Most lenders that use this mortgage
insurance product make their requests through a provision known as "direct endorsement,"
which authorizes them to consider applications without submitting paperwork to HUD.
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FHALoan.com is a private mortgage company specializing in fha home loans and is not associated with the federal government or HUD / FHA.
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