Change Date

September 15, 2004, Change 4

This section has been changed to create subsection lettering.

a. Description

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.

b. Amortization Examples

The initial payment on a GEM is typically based on what the payment would be for a 30-year mortgage under the standard amortization plan.  Payment increases can be fixed or tied to an index.

Example 1:  Monthly payments are increased by 3% each year for the first 10 years.  The payments level off in the 11^th 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.

Example 2:  The increases in the monthly payments are based on a percentage of a Commerce Department index that measures per capita, after-tax disposable personal income in the United States.

c. Underwriting

The lender must determine that the applicant’s income can reasonably be expected to keep pace with the increases in the monthly mortgage payment.