4240.2 REV

1\. GENERAL. As of November 1, 1976, all Field Offices were authorized

to accept for processing applications for mortgage insurance under

Section 245. This Handbook details the procedures to be followed

to insure a mortgage under Section 245. Field Office staffs must

become thoroughly familiar with the new Section 245 Program. Where

a change in processing is not specifically identified, outstanding

instructions established for mortgages insured under the

Section 203(b) or Section 234(c) programs shall apply.

2\. BACKGROUND. Section 245 of the National Housing Act, under which

the Graduated Payment Mortgage (GPM) Plan was implemented, was

enacted as a part of the Housing and Community Development Act of

1974\. Legislative amendments were also provided in the Housing

and Community Development Act of 1977.

3\. OBJECTIVE. HUD\'s objective has been to develop and promote new

methods of mortgage financing which will help meet the needs of

the potential homebuyer presently priced out of the housing market

because of the cost of housing. By the development of the Graduated

Payment Mortgage Program, HUD has taken steps to meet this objective.

4\. MAJOR FEATURES OF THE PROGRAM.

a\. Mortgages shall be insured under Section 203(b) or 234(c)

pursuant to Section 245 and must meet the requirements of these

sections except as specifically modified below.

b\. Five specific plans are authorized. Three plans will permit

five years of increasing payments at 2-1/2, 5, and 7-1/2

percent annually. However, during each year, the monthly

payments will be level. Increases will occur annually.

Starting in the sixth year (for the five-year plans) or the

eleventh year (for the 10-year plans), the monthly payments

will be level for the remaining term.

c\. Description of Plans I, II, III, IV, and V.

Plan I Monthly mortgage payments increase 2-1/2 percent each

year for five years.

Plan II Monthly mortgage payments increase 5 percent each

year for five years.

Plan III Monthly mortgage payments increase 7-1/2 percent each

year for five years.

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4240.2 REV

Plan IV Monthly mortgage payments increase 2 percent each

year for ten years,

Plan V Monthly mortgage payments increase 3 percent each

year for ten years.

5\. APPLICATION FOR MORTGAGE APPROVAL.

a\. Except as modified herein, the mortgage credit underwriting

determination shall be applied in accordance with the instructions

in Handbook 4155.1 or Handbook 4265.1 for Section 203(b)

or Section 234(c), respectively.

b\. Factors for computing monthly installments to amortize a loan

for each of the five plans are shown in Appendix 1. Appendix 2

contains factors for computing the annual mortgage insurance

premium for each of the five plans. In computing the monthly

payments, the monthly installments should be increased to the

next highest penny. This will ensure that the actual deferred

interest is always less than the amount shown in the note.

c\. Occupant mortgagor. The program is limited to owner-occupant

mortgagors. The application for approval of the mortgagor shall

be made on Form FHA 2900, Mortgagee\'s Application for Mortgagor

Approval and Commitment for Mortgage Insurance under the

National Housing Act. The submittal must include a certification

from the mortgagors that they are aware that the plan chosen

provides for increasing monthly payments for a period of five

or ten years. Under Item 2 of Form 2900, insert along with the

case number, the specific plan selected (i.e., PLAN I, PLAN II,

PLAN III, PLAN IV, or PLAN V).

d\. The following certification shall be attached to each Form

FHA 2900 submitted pursuant to Section 245;

\"I/we certify that I/we fully understand the obligation

I/we are undertaking, that my/our mortgage payment to principal

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4240.2 REV

and interest will start at \$\_\_\_\_\_\_\_\_\_\_ and will increase by

\_\_\_\_\_% each year for \_\_\_\_\_\_ 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 shall increase

the principal is \$\_\_\_\_\_\_\_\_\_\_. Monthly installments shall be

due according to the following schedule:

(For use with Plans I, II, or III)

Principal & Interest Mortgage Insurance Premium

\$\_\_\_\_\_\_\_\_\_ during the 1st note year \$\_\_\_\_\_\_\_\_ during
the 1st note year

\_\_\_\_\_\_\_\_\_ during the 2nd note year \_\_\_\_\_\_\_\_ during the
2nd note year

\_\_\_\_\_\_\_\_\_ during the 3rd note year \_\_\_\_\_\_\_\_ during the
3rd note year

\_\_\_\_\_\_\_\_\_ during the 4th note year \_\_\_\_\_\_\_\_ during the
4th note year

\_\_\_\_\_\_\_\_\_ during the 5th note year \_\_\_\_\_\_\_\_ during the
5th note year

\_\_\_\_\_\_\_\_\_ during the 6th note year \_\_\_\_\_\_\_\_ during the
6th note year

and thereafter and will continue to

decline thereafter

OR

(For use with Plans IV or V)

Principal & interest Mortgage Insurance Premium

\$\_\_\_\_\_\_\_\_\_ during the 1st note year \$\_\_\_\_\_\_\_\_ during
the 1st note year

\_\_\_\_\_\_\_\_\_ during the 2nd note year \_\_\_\_\_\_\_\_ during the
2nd note year

\_\_\_\_\_\_\_\_\_ during the 3rd note year \_\_\_\_\_\_\_\_ during the
3rd note year

\_\_\_\_\_\_\_\_\_ during the 4th note year \_\_\_\_\_\_\_\_ during the
4th note year

\_\_\_\_\_\_\_\_\_ during the 5th note year \_\_\_\_\_\_\_\_ during the
5th note year

\_\_\_\_\_\_\_\_\_ during the 6th note year \_\_\_\_\_\_\_\_ during the
6th note year

\_\_\_\_\_\_\_\_\_ during the 7th note year \_\_\_\_\_\_\_\_ during the
7th note year

\_\_\_\_\_\_\_\_\_ during the 8th note year \_\_\_\_\_\_\_\_ during the
8th note year

\_\_\_\_\_\_\_\_\_ during the 9th note year \_\_\_\_\_\_\_\_ during the
9th note year

\_\_\_\_\_\_\_\_\_ during the 10th note year \_\_\_\_\_\_\_\_ during the
10th note year

\_\_\_\_\_\_\_\_\_ during the 11th note year \_\_\_\_\_\_\_\_ during the
11th note year

and thereafter and will continue to

decline thereafter

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4240.2 REV

In addition I/we will be required to make payments toward

taxes, hazard insurance and other costs of homeownership.

Signed:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mortgagor

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Mortgagor

The above certification shall be prepared in duplicate.

The mortgagor shall retain a copy and the original shall remain

in the case binder.

6\. MORTGAGE CREDIT PROCESSING.

a\. The application for approval of the mortgagor shall be processed

pursuant to outstanding mortgage credit guidelines established

for Section 203(b) or Section 234(c) cases. In addition, care

should be taken to assure that the applicant being approved has

reasonable expectations of increased income to pay the mortgage

payment increases specified under the plan selected.

b\. The minimum cash investment will be the greater of: (1) 3% of

the first \$25,000 plus 5 percent of the balance of acquisition

cost above \$25,000; or (2) that amount necessary to cover the

difference between the maximum insurable loan amount and the

acquisition cost.

c\. Amount and amortization period of loan.

\(1\) Occupant mortgagor. The program is limited to owner-occupant

mortgagors. The principal amount of the mortgage

cannot exceed the lesser of:

\(a\) 97 percent of the first \$25,000 of value and closing

costs, plus 95 percent of the remainder, but not

exceeding \$60,000; or

\(b\) An amount which, when added to all deferred interest

pursuant to the financing plan selected, shall not

exceed 97 percent of the appraised value of the property

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4240.2 REV

covered by the mortgage as of the date the mortgage

is accepted for insurance. However, if the mortgagor

is a veteran, the mortgage amount, when added to all

deferred interest pursuant to the financing plan

selected, shall not exceed the applicable limits

prescribed for veterans under Section 203(b).

\(2\) Term. The term of the loan shall be limited to 30 years

or 3/4 of the estimated remaining economic life of the

property, whichever is lesser.

\(3\) Assumptions. Assumptions under this program are permitted

as in all other programs. When an assumptor has been

identified, the mortgagee should attempt to obtain

from the new mortgagor a certification, in duplicate,

see paragraph 5. d. The mortgagor shall retain a

copy and the mortgagee shall place the original in its

records.

\(4\) Program Limitations.

\(a\) The program is limited to owner-occupant mortgagors

and single family dwelling units.

\(b\) The program is not available for the purchase of

two to four-family units.

\(c\) Refinancing of an existing mortgage with level annuity

payments to a GPM plan is not permitted. However,

mortgagors with a GPM plan may refinance at any time

to a level annuity mortgage.

d\. Computing the maximum loan amount. Since the maximum mortgage

amount cannot exceed the lesser of (a) or (b) cited above, it

will be necessary to compute the allowable loan amount both on

the basis of the method applicable to Section 203(b) as well

as on the basis of 97 percent of the value including deferred

interest.

Example: Assume a HUD value of \$49,000 and closing costs of

\$1,000 and the cost of acquisition is \$50,000. The mortgagor

has requested a 30-year term at 8-1/2 percent and selected a

GPM plan with increasing payments of 7-1/2 percent a year for

the first five years of the mortgage term (Plan III). Referring

to Appendix 3, page 17, the principal amount of the mortgage

reaches the greatest amount after the 48th monthly payment, the

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4240.2 REV

end of four years. The highest outstanding balance factor is

1037.3747 or the mortgage amount will increase by approximately

3.7 percent from the amount disbursed at origination.

NOTE: Under all plans, the maximum outstanding balance

will always occur at the end of a year unless no

negative amortization is involved.

Regular GPM

Criterion I: 97 percent of \$25,000 = \$24,250

95 percent of \$25,000 = 23,750

\_\_\_\_\_\_

\$48,000 Maximum Loan

Criterion II: 97 percent of \$50,000 = \$48,500

\$48,500 divided by 1037.3747 (the highest

outstanding balance factor) = \$46.7526

\$46.7526 x 1000 = \$46,752 Maximum Loan

Maximum Allowable Loan (lesser of I or II): \$46,750

GPM for Veterans

Criterion I: 100 percent of \$25,000 = \$25,000

95 percent of \$25,000 = 23,750

\_\_\_\_\_\_

\$48,750 Maximum Loan

Criterion II: 100 percent of \$25,000 = \$25,000

95 percent of \$25,000 = 23,750

\_\_\_\_\_\_

\$48,750

\$48,750 divided by 1037.3747 (the highest

outstanding balance factor) = \$46.9936

\$46.9936 x 1000 = \$46,993 Maximum Loan

Maximum Allowable Loan (lesser of I or II): \$46,950

GPM for Property Under Construction or Completed Less than One

Year

Criterion I: 90 percent of \$50,000 = \$45,000 Maximum Loan

Criterion II: 97 percent of \$50,000 = \$48,500

\$48,500 divided by 1037.3747 (the highest

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4240.2 REV

outstanding balance factor) = \$46.7526

\$46.7526 x 1000 = \$46,752 Maximum Loan

Maximum Allowable Loan (lesser of I or II): \$45,000

e\. Because of the negative amortization feature of the Section 245

program, it is possible for the outstanding principal balance

on a mortgage insured under this section to exceed \$60,000.

No violation of Section 245 of the National Housing Act nor the

regulations issued pursuant thereto occurs when the outstanding

balance on a mortgage loan exceeds \$60,000 pursuant to one of

the financing plans approved by FHA.

f\. Effect of interest rate increase on outstanding firm commitments.

With respect to the Graduated Payment Mortgage Program, closing

a loan at an interest rate higher than that specified in the

firm commitment could result in the mortgage amount exceeding

the statutory maximum. Therefore, after an interest rate

increase, if a mortgagee desires to close at the new maximum

based on a firm commitment issued under Section 245 prior to

the effective date of the higher interest rate, the mortgagee

must surrender the outstanding commitment to the local Field

office in order that an appropriate change can be made in the

maximum mortgage amount. If the mortgagee decides to close

the loan at an interest rate equal to or less than that stated

in the outstanding firm commitment, the local Field Office will

not have to recalculate the mortgage amount.

7\. COMPLIANCE WITH STATE AND LOCAL LAWS. Prior to the origination of

any mortgage under this Section, each mortgagee is responsible for

ascertaining whether the mortgage provisions outlined herein are

permissible under local and State law. The Housing and Community

Development Act of 1977 provides for a limited preemption of those

State restrictions which would be applicable to Section 245

mortgages solely because of the method provided for payment of

principal and interest. Section 206 of the Housing and Community

Development Act of 1977 which amends Section 245 of the National

Housing Act states in part \"any mortgage or loan insured pursuant

to this section which contains or sets forth any graduated mortgage

provisions (including but not limited to provisions for adding

deferred interest to principal) which are authorized under this

section and applicable regulations or which have been insured on

the basis of their being so authorized, shall not be subject to

any State Constitution, statute, court decree, common law, or rule

or public policy limiting the amount of interest which may be

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4240.2 REV CHG

charged, taken, received, or reserved, or the manner of calculating

such interest (including but not limited to prohibitions against

the charging of interest on interest), if such statute, court

decree, common law, or rule would not apply to the mortgage or loan

in the absence of such graduated payment mortgage provisions.\"

\* 8. NOTE AND MORTGAGE INSTRUMENT. Instructions and examples of the

modifications to a note and mortgage instrument for loans insured

under Section 245 are set forth in Appendix 4. \*

9\. CODE IDENTIFICATION.

a\. For the purpose of identification and tracking, the Section

of the Act codes shall be identified as follows:

Insurance Program by Section Suffix Code

203(b) 270

234(c) 271

b\. When a case is submitted for insurance endorsement pursuant

to this program, the mortgagee shall include the plan number

in parentheses following the FHA Case Number on the Mortgage

Insurance Certificate Form FHA 9100-1.

8/78 Page 8

HUD-Wash., D. C.

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4240.2 REV

10\. STATISTICAL REPORTING REQUIREMENTS

a\. To evaluate the effectiveness of the GPM program, close scrutiny

of the program is necessary and essential. Consequently, on the

first working day after the 15th and last day of each month, the

Records Clerk shall prepare and submit a semimonthly report on

program activity to:

Management Information Systems Division

Single Family Insured Branch

Room 9249

451 Seventh Street, S. W.

Washington, D. C. 20410

\(1\) The required information should be reported on Form

FHA 2498 Rev. 11/77. Firm commitment applications under

the program can be determined from Form FHA 2900-1, Box 2.

The Receiving Clerk shall count all firm applications which

have a plan number designated in Box 2 for the purposes

of this report (see paragraph 5c). It is important that

the number of firm applications be counted by Section of

the Act, i.e., Section 203(b) or Section 234(c) and plan

option within those sections. To compile the number of

firm commitments issued during a reporting period for this

program, the same procedure as outlined above applies. The

Commitment Clerk shall examine Form FHA 2900-4, Box 2, to

obtain this information.

\(2\) The number of Endorsements Completed can be determined

from the Form FHA 9100-1 which indicates the FHA Case Number

and Plan Number (see paragraph 9b). Cases insured under

Section 203 pursuant to Section 245 will be identified by

the suffix code 270 and cases insured under Section 234(c)

pursuant to Section 245 will be distinguished by the suffix

code 271. The Endorsement Clerk should count those Mortgage

Insurance Certificates, Form FHA 9100-1, which have the

suffix codes. Again, it will be necessary for the clerk to

separate the cases by Section of the Act and plan number

for record-keeping purposes.

\(3\) With regard to Reconsideration Requests, the Receiving

Clerk shall count all requests received which are

reconsiderations of previously received applications under

Section 245.

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