VA Growing Equity Mortgages (GEM)

VA home loans at one time included options such as Growing Equity Mortgages (GEM) which are designed to help borrowers ease into the mortgage, grow equity faster, and pay off the loan sooner. These choices were offered by participating lenders, though not all lenders chose to do so.

GEMs and other options are just some of the details first-time home buyers have to contend with. The VA home loan program has many options for first-time home buyers and repeat borrowers alike. Among the choices borrowers have to make with their VA mortgage loan benefits? The nature of the mortgage itself and not just where the term of the loan is concerned.

What Was The VA Growing Equity Mortgage?

Those who qualify with military service to apply for a VA mortgage have the option to apply for 30-year fixed-rate mortgages, adjustable rate loans, and other options. But other choices include whether to finance discount points where permitted, whether to finance the VA Loan Funding Fee, and how to structure the mortgage.

The Growing Equity Mortgage was one such way to set up a home loan; the VA GEM was designed to feature “gradually increasing” monthly mortgage payments. The increased amount is applied to the principal of the mortgage and not the interest, which results in savings over the lifetime of the loan in interest payments.

How VA Growing Equity Mortgages Work

VA Growing Equity Mortgages are based on a 30-year repayment plan, with mortgage payment increases (see above) can be established at fixed periods during the loan or more flexible arrangements via being “tied to an index” as the VA official site describes it.

The Department of Veterans Affairs official site provides an example of how to calculate the increases:

• Monthly payments are increased each year for the first 10 years
• The payment increase in the VA example is three percent per year
• The increases end when the loan goes into its eleventh year
• Payments starting in the 11th year and beyond are constant
• “Loan payoff may occur” within “a few years” after the mortgage payments level off

VA loan rules state clearly that when underwriting a VA GEM, the lender is tasked with ensuring the borrower’s income is such that the increased mortgage payments are still affordable.

Your lender may need tax documentation of your income, projected income, and other financial information to determine this much in the same way your income is otherwise typically verified by the lender.

In this particular case, the lender has to make calculations that show the borrower can afford the VA loan in the initial stage of the GEM when payments are lower AND after the increases begin.

Remember that income must meet certain VA and lender requirements to count as “verifiable” for the purposes of approving your mortgage. Verifiable income is such that the lender can reasonably expect it will continue for a set period (defined by the lender, three years is not an unreasonable benchmark).

If you have only recently started earning commissions, self-employment income, working as a contractor, or have had a major career change, the lender may not be able to count such income until you have established that the earnings are stable and reliable.

Those who have been self-employed or working on commissions for less than a year should expect a much more difficult time getting that income approved than for those who have longer earning records as non-traditional, self-employed, or otherwise alternatively employed.

And that’s not just advice for those looking at a certain kind of VA home loan–all VA mortgages operate on that principle.

The VA Loan Program Has Changed

Unfortunately, the VA changed its regulations and policies and as late as 2019 revisions were made to the VA Lender’s Handbook, Chapter Seven, which governs loans that need “additional consideration” or “special processing.”

In the previous version of the VA Lender’s Handbook prior to extensive revision, two sections addressing Growing Equity Mortgages as well as Graduated Payment Mortgages (GPMs) explained the programs in detail. However, VA Pamphlet 26-7 (the official name of the VA Lender’s Handbook) as it is presented at press time omits both types (GEMs and GPMs) from Chapter 7.

Those portions have been deleted in their entirety and there is no official reference to VA Growing Equity Mortgages in VA Pamphlet 26-7. What follows is made available as a reference only–VA loan rules sometimes take a long time to update and revise and many potential VA borrowers may find older (and outdated) information on VA mortgages–this article explains what the VA GEM once was but it is not an active option for today’s borrower.

Alternatives To The VA Growing Equity Mortgage

As mentioned above, the VA Growing Equity Mortgage is no longer supported by VA loan program guidelines. But that does not mean you can’t explore other options with your VA mortgage benefit that can help save money on your monthly payments in the earliest days of the loan.

VA Temporary Interest Rate Buydowns

While VA GEMs are not an option listed in VA Pamphlet 26-7, a March 2019 revision to the VA Lender’s Handbook did keep the option to apply for a VA home loan that features a temporary interest rate buydown.

What does that mean? The VA official site says participating lenders may offer to establish and fund an escrow account for the borrower “to temporarily reduce a borrower’s loan payments during the initial years of the mortgage.”

VA.gov states that such buydowns can be used with any VA-guaranteed mortgage loan.

The VA Adjustable Rate Mortgage

Other options include a VA Adjustable Rate mortgage (VA ARM) which features a lower introductory interest rate (the “teaser rate”) and increased mortgage payments over a fixed term. VA ARM loans are designed to be as predictable as possible (rate changes are scheduled once per year once they begin and are restricted in terms of how much the rate can increase at any one time).

Like the VA GEM, your loan officer will be tasked to make sure you can afford the loan both in the introductory stage and when the payments begin to increase.

The VA ARM loan isn’t right for everyone. If you don’t have a plan to refinance your mortgage once the introductory rate passes (or when the rate increases go too high), you are at a serious disadvantage with an Adjustable Rate mortgage.

It’s better to have a strategy, especially if you aren’t planning to stay in that particular property for the full duration of the loan amount.

ARM loans are great if you have plans to refinance or sell. If you think you will be in the home for most or all of the loan term, be sure to do the math on a fixed-rate mortgage and compare the costs for both if you stay in the home longer.

Joe Wallace is a 13-year veteran of the United States Air Force and a former reporter for Air Force Television News