Graduated Payment Mortgages (GPMs) Part 3

Deciphering the VA Lender’s Handbook Chapter 7 Part 16


The last two articles have covered a great deal of very important information about GPMs in the VA loan program. If you’re wondering what a GPM is, or how it is different from a How APR is calculatedstandard loan, check out the first article about GPMs. If you’re looking for information on the maximum loan amounts on a GPM and the required down payment, check out the second article on GPMs. In this article we’ll be finishing up GPMs with explaining how the monthly installments are calculated, how the APR is calculated, considerations a lender has for underwriting (which affect you as the borrower), the veteran’s statement required for GPMs, and other requirements for GPMs.


The monthly payments on a GPM change throughout the first five years of the loan, then remain the same for the remaining term. Therefore, the monthly payments are subject to some calculation. The Department of Housing and Urban Development (HUD) offers a table that helps lenders calculate the monthly payments throughout the loan based on the loan amount and the interest rate on the loan. You yourself can actually access the calculator HUD uses to determine the monthly installments here. Using that calculator, you can prepare yourself for meeting with your lender and discussing a GPM. However, do not rely on that calculator or any tools from HUD to calculate the APR on a GPM, because the HUD program requires mortgage insurance premiums, while the VA does not.


The single biggest underwriting consideration facing the lender is whether the borrower’s income will increase enough in the next five years to cover the increasing monthly payments. If the income doesn’t keep pace, both the borrower and the lender will regret closing on the GPM. The lender looks for an indication that the borrower’s income will increase, and if they do, they can underwrite the loan using only the first year’s mortgage payment for qualification. If there are not strong indicators that the borrower’s income will increase, the lender will need to underwrite the loan using the monthly payment that would be used on a standard amortization schedule, and can use the lower initial payments as a compensating factor if appropriate.


The veteran borrower must sign a statement declaring that he or she understands the differing monthly payments that they will be required to pay and when. Below is the statement as provided by the Handbook:


“I fully understand that because of the graduated-payment loan obligation I am undertaking, my mortgage payment excluding taxes and insurance will start at $________ and will increase by 7.5 percent each year for 5 years to a maximum payment of $_________ , and the mortgage balance will increase to no more than $_________ at the end of the _____ year. The maximum total amount by which the deferred interest will increase the principal is $________. Monthly installments will be due according to the following schedule:

• $__________ during the first year of the loan

• $__________ during the second year of the loan

• $__________ during the third year of the loan

• $__________ during the fourth year of the loan

• $__________ during the fifth year of the loan

• $__________ during the sixth year of the loan and every year thereafter.”

Other than that statement and the other requirements already discussed, the property being purchased with the GPM must have a remaining life expectancy of at least 30 years, and a GPM cannot be used to refinance a home. However, a GPM can itself be refinanced by a fixed-rate VA-guaranteed loan. The Handbook states no restriction on when during the loan term a GPM must be refinanced, or when the home can be sold to another borrower. If you are considering getting a GPM, first read all three articles here about the GPM to gain an understanding of what the GPM is and what it is for. Then, sit down with a VA-approved lender with some specific questions about your circumstances, and see if they recommend a GPM. There are not too many cases where a GPM is the best option, but it can definitely be a lifesaver when it is.

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