How VA Growing Equity Mortgages Work
Since the housing market crisis of 2008, the idea of a home with growing equity probably sounds like a dream to many; so many home owners are underwater on their mortgages that the idea of a new purchase loan issued as a “Growing Equity Mortgage” could seem like an unlikely choice at first glance. But with recent headlines on a recovering housing market, rising house prices, and interest rates that are still quite low, could the VA Growing Equity Mortgage make a comeback in the months or years to come?
The VA guidebook for lenders, VA Pamphlet 26-7, describes the Growing Equity Mortgage (GEM) as follows:
“A GEM has gradually increasing monthly payments, with all of the increase applied to the principal balance. Compared to the standard amortization plan, GEMs have a faster accumulation of equity and earlier loan payoff. GEM amortization plans are generally acceptable for VA loan purposes.”
The VA GEM “initial payment” plan is based on the mortgage payments for a typical 30-year mortgage under a standard amortization arrangement. According to the VA, “Payment increases can be fixed or tied to an index.
Example 1: Monthly payments are increased by three percent each year for the first 10 years. The payments level off in the eleventh year and remain constant through loan payoff. Loan payoff may occur within a few years of the leveling off of the payment, depending upon interest rate.” Another VA example provided in VA Pamphlet 26-7 describes increases in the monthly mortgage payments as being “based on a percentage of a Department of Commerce index that measures per capita, after-tax disposable personal income in the United States.”
What makes VA Growing Equity Mortgages different than a standard VA home loan? Qualification requirements.. “The lender must determine that the applicant’s income can reasonably be expected to keep pace with the increases in the monthly mortgage payment.”
With property values rising in many markets, and some home owners suddenly finding themselves able to sell a home without being underwater on the deal, could the housing market be ready for VA growing equity mortgage loans once more? Time will tell, in the meantime it never hurts to know what your options might be in the future with the range of VA loan options at your disposal.
Do you have questions about VA home loans? Ask us in the comments section.