Graduated Payment Mortgage
Gustan Cho Associates

What Is Graduated Payment Mortgage On FHA Loans

This BLOG On What Is Graduated Payment Mortgage On FHA Loans Was UPDATED On December 9th, 2018

A graduated payment mortgage, AKA a “GPM”, is a home loan with low beginning with regularly scheduled monthly payments that increase over time.

  • These designs generally target younger borrowers who can’t manage large payments presently, yet can reasonably expect to bring their earnings up in the future
  • A medical student is the prime example of an ideal GPM candidate
  • A GPM is a negative amortization loan
  • A negative amortization loan, meaning that the balance of the loan (at least initially) increases

Graduated Payment Mortgage Versus Other Loan Programs


  • Only readily available in the USA for mortgages insured by the FHA
  • Over the initial period, usually 5 to 15 years, the monthly FHA payments increase every year according to a preset percentage
  • For example, a borrower could have a 30 year Graduated Payment Mortgage mortgage with a monthly payment that increases 5% every year for 5 years
  • After the 5th year, the yearly increase stops and the borrower would pay the new loan amount until the loan is paid in full

Benefits Of Graduated Payment Mortgage

  • Allows the opportunity for someone to be a homeowner and build equity earlier than some conventional mortgages
  • This can be quite attractive to a young upwardly mobile family
  • Low mortgage payments in the first years gives borrowers “breathing room” to save and spend money accordingly

Negatives Of Graduated Payment Mortgage

It can lure borrowers in and make them predict their future earnings and payment capabilities, which can be difficult.

  • If borrowers overestimate their future earning potential they may find themselves in a tough situation, especially if their property value stay stagnant or even worse declines
  • Then they could be stuck with a house they cannot sell or refinance with payments that they cannot afford
  • Despite enabling borrowers savings at the beginning of their loan term, the overall expense of the loan is higher than that of a conventional mortgage

Differences Between Graduated Payment Mortgage And ARM

Unlike an ARM, GPMs have a fixed note rate and payment schedule.

  • The major difference between the GPM and an ARM is that the borrower with a GPM knows in advance exactly how and when the payment will change
  • The Adjustable Rate Mortgages is more of a gamble

The 5 Year Graduated Payment Mortgage Plan

3 of the 5 FHA GPM plans permit mortgage payments to increase at a rate of 2.5 percent, 5 percent, or 7.5 percent in the initial 5 years of the loan:

  • The other 2 plans payments increase at a rate of of 2 to 3 percent every year after 10 years
  • In the 11th year of this plan and until the end of the term, payments will remain the same
  • Despite enabling borrowers savings at the beginning of their loan term, the overall expense of the loan is higher than that of a conventional mortgage

How Does One Qualify For Graduated Payment Mortgage Plan

Graduated Payment Mortgages are accessible to individual who reasonably expects their income to increase significantly. GPMs are limited to primary residence home loans.

About The Author

Michael Gracz is a contributing associate editor for Gustan Cho Associates. Mike Gracz who holds two law degrees and is armed with an MBA, is also a licensed mortgage loan originator with The Gustan Cho Team at Loan Cabin Inc. and is licensed in multiple states. Michael Gracz is not just an expert in lending but is a real estate investor himself. Mike specializes in helping borrowers get qualified on home loans where other lenders cannot do due to him being associated with Gustan Cho Associates a team of mortgage professionals who are known nationally for its concentration on helping borrowers with no lender overlays. Stay tuned for more blogs by Michael Gracz.