The large down payment required to purchase a home with conventional financing, usually 20 percent, is often beyond the means of many buyers. For purchasers who can afford the monthly payments, second party financial backing may lead to home ownership.
FHA, VA and private mortgage insurance are examples of second-party financial backing. In each case a lender provides a mortgage with the understanding that a second party other than the buyer will assume some portion of the lender's risk.
Any qualified individual can get an FHA-backed loan for as much as $60,000 to purchase an owner-occupied, single-family home. Under the FHA formula, the down payment would be equal to 3 percento of the first $25,000 of the mortgage and 5 percent of the balance. For a $60,000 property, a buyer using the FHA program would need a $2,500 down payment plus settlement costs. The monthly payments for this loan, assuming a 9.5 rate of interest plus a .5 percent mortgage insurance premium, would be $504.61.
While the FHA regular mortgage program offers an extremely attractive down payment plan, the monthly costs are too high for many individuals. To resolve the monthly payments problem, at least initially, the FHA now offers a graduated payment mortgage plan (GPM)
With GPM, the mortgage payments during the first years of home ownership are lower than comparable costs for a regular FHA mortgage. Over a period of five to 10 years, the payments rise to a point where they are above the regular rate.
The GPM concept offers both a low down payment plus reduced initial mortgage costs. Because of inflation, future and higher mortgage payments are being paid with increasingly cheaper dollars. Since most people do not own a home for 30 years anyway, the question of future payments is probably academic.