Do you expect your income to increase in the next few years?
Section 245(a) Loans (Graduated Payment Mortgage Program) helps borrowers whose income is expected to rise, buy a home sooner by making mortgage payments that start off small and increase over time.
This article will take an in-depth look at the FHA section 245(a) loan program, requirements, who is eligible, and program benefits.
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What is an FHA Section 245(a) Loan?
Section 245(a) loans, also called FHA Growing Equity Mortgages, is a type of FHA loan. They provide home loans to borrowers who expect their income to increase gradually over time. 245(a) loans have a monthly payment that increases annually according to the graduated-payment schedule.
While the mortgage payments change, the interest rate does not, the rate is fixed for the life of the loan. Before applying for a 245(a) loan you will need to submit a special application explaining your situation to the lender.
245(a) loans allow you to build equity in your home more quickly and pay off your mortgage faster than the standard 30 years.
FHA Section 245(a) Loan Requirements
FHA 245(a) Loan Requirements
• Two years of steady income
• 580+ credit score
• Down payment of 3.5%
• Maximum 43% debt-to-income ratio
• 24 month waiting period after a bankruptcy or foreclosure
• Must occupy the home as your primary residence
• Home must meet FHA's minimum property standards
The 5 FHA 245(a) Plans Available
There are five repayment plans for the 245(a) mortgage program for borrowers to choose from.
1. Monthly mortgage payments increase 2.5% each year for five years.
2. Monthly mortgage payments increase 5% each year for five years.
3. Monthly mortgage payments increase 7.5% each year for five years.
4. Monthly mortgage payments increase 2.0% percent each year for ten years,
5. Monthly mortgage payments increase 3.0% percent each year for ten years.
Who is Eligible?
The 245(a) loan program is designed specifically for low-to-median income first-time homebuyers or young families whose income will increase over time. These loans have a fixed-rate and the monthly mortgage payment starts off low and gradually increases annually.
FHA 245(a) Loan Ideal Borrower
• Can be a first-time buyer or repeat home buyer
• Income that will increase in the future
• Does not want to make any balloon payments
• Wants to pay off their mortgage loan faster
• Wants to accumulate equity quickly
• Meets the FHA loan requirements
Like FHA loans, FHA 245 Growing Equity Mortgages require borrowers with a 580 or higher credit score to have a 3.5% down payment. Borrowers with a 500-579 credit score may qualify with 10% down.
No Credit History
If you have no credit history then your lender will ask for alternative credit lines, such as rent and phone payments to establish positive payment history
Bankruptcy will not disqualify you for an FHA loan. There is a 24 month waiting period after a chapter 7 bankruptcy, or 12 months if you have extenuating circumstances. You must reestablish positive payment history since your bankruptcy was filed.
A single late payment will not disqualify you however you should not have any. more than one late payment on any of your accounts in the past 12 months
36 month waiting period after a foreclosure, 12 months with extenuating circumstances.
Collections, Judgements, and Federal Debt
FHA rules state that a lender must verify that judgments and Federal debt has been paid, or on a payment plan. Collections will not disqualify you, your lender may require you to pay off collections in certain situations.