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HUD   >   Program Description   >   Growing Equity
Growing Equity Mortgage Insurance (Section 245(a))
Summary: 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.

Purpose:
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 some 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 Grantees:
FHA-approved lending institutions, such as banks, mortgage companies, and savings and loan associations, can provide Section 245(a) insurance through HUD Field Offices.

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 are made through an FHA-approved lending institution. 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.

Technical Guidance:
This program is authorized under Section 245(a), National Housing Act, as amended (12 U.S.C. 17152-10(a)). Its regulations, as well as handbooks, notices, and letters relevant to this program, are available through HUDCLIPS. Section 245(a) is administered by HUD's Office of Housing-Federal Housing Administration.

For More Information:
To learn more about this program and other financing options, homebuyers should contact a HUD-approved lender for a searchable listing of approved lenders nationwide, a HUD-approved housing counseling agency, or the toll-free FHA Mortgage Hotline, 1-800-CALLFHA.