Deciphering the VA Lender’s Handbook Chapter 7 Part 15
The last article explained what a GPM is, what makes it different from a standard amortization schedule, and what a GPM can be used for. GPMs start out with lower monthly payments which increase steadily over a graduation period, then finish the loan at a maximum amount. This article is going to talk about the maximum loan amount and down payment required on a GPM, and some notes on amortization. If we have a chance, we’ll cover how the monthly payments are calculated in this article. Otherwise, it will be covered in the following one.
As with all other new purchase VA loans, the property being purchased must undergo an official VA appraisal, after which a Notice of Value (NOV) will be issued that states the reasonable value of the property. Also just like all other new purchase VA loans (and refinances, for that matter), the loan cannot be made for more than the reasonable value of the property as shown on the NOV, plus any financed closing costs and EEM. With GPMs, though, it gets a little more complicated. Since during the initial period of the loan, where less is being paid off each month than is being added to the loan in interest, the principal balance of the loan will actually increase – potentially beyond the reasonable value of the home. The VA does not approve of this situation and requires a down payment on GPMs of whatever amount is required to keep the principal balance from ever exceeding the reasonable value of the property on the NOV.
The maximum initial loan amount (and, by default, the required down payment) is calculated using the Department of Housing and Urban Development’s (HUD) tables for GPMs that show the principal balance and monthly installments for every $1,000 of the original loan proceeds. The equation will also be affected by the interest rate on the loan. The difference between the maximum loan amount and the value of the home is the amount of down payment that is required. The above is how the maximum loan amounts and downpayments are handled for regular loans, but the maximum loan amount and down payment required are different when using a GPM for a construction loan or a brand new home that has not been previously occupied.
In many ways, the max loan amount and down payment required are much simpler when using a GPM on a construction loan or brand new home. The max loan amount cannot “…exceed the lesser of the purchase price or 97.50 percent of the initial reasonable value of the property.” A down payment will be required to make up the difference between the reasonable value and the amount of the loan. In the amortization schedule, the principal owed can never exceed the reasonable value of the property. This puts a limit on how small your monthly payments can get on a GPM but probably won’t cause too many problems on that front.
While it may seem that having to pay a down payment is a major drawback of the GPM, many borrowers actually use it to their advantage – by making a substantial enough down payment, a borrower can actually offset the negative amortization that comes with a GPM. In other words, they can cut the principal down enough that they don’t end up paying more with a GPM than they would with a standard amortization schedule. If you’ve got a decent-sized nest egg (or an extra car to sell), this may be a good way to get a home that your income won’t be big enough for until a few years down the road, with lower monthly payments now and essentially no penalty.
Amortization on GPMs is actually standardized across the VA loan program. Your monthly payment will increase 7.5% each year for the first 5 years. From the 6th year and onward, the payment becomes level at the maximum for the remainder of the loan term. In the next article, we’ll cover how the monthly installments are calculated, how the APR is calculated, special underwriting considerations, the veteran’s statement, and other requirements for GPMs in the VA loan program. We will finish covering GPMs in the next article.