Buying a home can feel out of reach when your income hasn’t caught up with your ambition.
So, if you do not have the income to afford a house, a Graduated Payment Mortgage (GPM) can help, starting with smaller monthly payments that increase over time.
These loans have early-career professionals in mind, specifically, those planning to climb the career ladder and who will earn a higher income in a few years. With this GPM mortgage, you can have more upfront buying power, and in exchange, the loan gets more expensive later.
Key takeaways:
The Graduated Payment Mortgage (GPM) is an FHA-insured home loan under HUD’s Section 245(a) that features low initial monthly payments that increase gradually over a set period.
It is a fixed interest rate, fully amortizing mortgage, meaning the interest rate remains constant and the loan will be paid off in full by the end of its term.
The biggest difference between this and a standard fixed loan is the payment schedule. Monthly payments start smaller and “graduate” upward each year for the first 5 or 10 years, then level off for the remaining 30-year term. This graduated structure aims to match payment growth with the borrower’s expected income growth.
In a GPM mortgage, the first few payments may be so low that they don’t cover all the interest due, which causes negative amortization (unpaid interest added to the loan balance) in the early years. However, once the “graduation” period ends, the payments stabilize at a higher amount that fully pays down the loan on schedule.
Basically, the FHA graduated payment mortgage program lets qualified buyers ease into homeownership with lower upfront payments, while still enjoying the security of a fixed-rate, fully amortizing loan.
The FHA offers five GPM plan options under Section 245(a), varying by how much and how long payments increase. The table below compares them:
GPM Plan | Annual Payment Increase | Graduation Period | Years with Level Payment After |
Plan I | 2.5% per year | 5 years | Years 6-30 |
Plan II | 5% per year | 5 years | Years 6-30 |
Plan III | 7.5% per year | 5 years | Years 6-30 |
Plan IV | 2% per year | 10 years | Years 11-30 |
Plan V | 3% per year | 10 years | Years 11-30 |
GPM loans are best for borrowers who expect their income to rise significantly in the near future, meaning ideal candidates would include:
A graduated payment mortgage starts with payments well below a standard 30-year fixed mortgage, reducing early financial strain for buyers, particularly younger buyers or those with limited income initially.
The low starting payment often makes it easier to qualify for the loan since debt-to-income (DTI) ratios at origination are lower.
Because the initial payments are lower, borrowers may qualify for more house upfront than under a level-payment loan. The graduated structure can increase one’s borrowing capacity, which helps to purchase a home sooner in expensive markets or move up to a house out of reach with standard financing. In other words, a GPM lets you grow into a larger mortgage as your income grows.
Unlike an adjustable-rate mortgage (ARM), the GPM’s interest rate is fixed for the life of the loan. You get the long-term predictability of a fixed rate, so even though your payments increase on a set schedule, they are not subject to market rate fluctuations.
This protects you from interest rate shocks; only the timing of your payment allocation changes, not the rate.
As with other FHA loans, GPMs include built-in protections like mandatory mortgage insurance and regulated underwriting standards.
Borrowers benefit from lower down payments (as low as 3.5%), more flexible credit score criteria, and more consumer-friendly rules, such as no prepayment penalties and the ability to assume the loan.
The structured payment increases also reduce default risk by aligning with expected income growth.
GPMs often involve negative amortization in the early years, meaning the loan balance can grow before it begins to shrink.
Because initial payments may not cover all accruing interest, the unpaid interest gets added to your principal owed. Borrowers must pay this deferred interest later, resulting in larger payments down the line and a higher total debt until the trend reverses.
Negative amortization can be risky because if you need to sell the home in those early years, you might owe more than you originally borrowed and potentially more than the home’s value.
So while the FHA caps the allowable amount of deferred interest, a GPM trades off lower payments now for a higher balance and interest cost later.
A graduated payment mortgage promises only temporary relief; eventually, you face significantly higher monthly payments.
Over the life of the loan, a GPM borrower pays more interest overall than if they had a level payment schedule because interest was deferred and additional interest accrued on that growing balance.
So, you pay for the initial discount with larger bills later. If your income fails to keep pace, these higher payments could be too expensive to maintain, possibly leading to default.
Not all mortgage lenders offer FHA Section 245(a) GPM loans. This program, while still authorized, is relatively uncommon in today’s market, so you may need to seek out specific FHA-approved lenders who handle GPMs.
The limited availability can make comparing rates and terms for GPM loan plans more difficult.
A GPM is generally unsuitable for borrowers with unpredictable or flat income prospects, such as gig economy workers, self-employed individuals with volatile earnings, or anyone not fairly confident about receiving promotions or income growth.
Conventional loans would better suit those with unpredictable income.
Qualifying for an FHA Graduated Payment Mortgage is similar to qualifying for any FHA loan.
Since a GPM’s affordability hinges on your future income, lenders scrutinize not just your current finances but also your earning potential, wanting to check whether you can afford the higher payments in a few years. This might involve looking at your work history, education level, career field, opportunities, and potentially job offer letters that show you’re slated for a promotion or higher-paying position.
You should prepare to explain your plan for handling the payment increases and demonstrate cash reserves or budgeting room to cover the larger payments as they kick in.
You might consider a GPM if:
You might want to avoid it if:
If a GPM mortgage doesn’t seem like the right fit, you can look into other FHA programs.
The standard FHA 30-year fixed mortgage has a fixed interest rate and level payments for 30 years. It’s simple and stable; what you pay in the first month is what you pay in the last.
The 203(k) Rehab Loan program is geared toward homebuyers buying fixer-uppers. With a 203(k), you can finance the purchase of the property (or refinance) plus get additional funds for approved improvements, all in one loan.
The Energy Efficient Mortgage (EEM) program allows FHA borrowers to finance energy-efficient upgrades along with their home loan, allowing you to install solar panels, new insulation, or efficient HVAC systems. The lower utility bills should offset the slightly higher mortgage payment. You can learn more about different FHA loan types here.
