VA Graduated Payment Mortgage (GPM)

The VA Graduated Payment Mortgage (GPM) is no longer offered or supported by the Department of Veterans Affairs. This page is provided as a historical reference only and does not reflect current VA loan policy.

The VA removed the Graduated Payment Mortgage and the Growing Equity Mortgage (GEM) when it updated VA Pamphlet 26-7. While older versions of the handbook still reference these loans, current VA rules no longer include them. If the VA were to revive either program in the future, this information could once again become relevant.

What Are Graduated Payment Mortgages?

A Graduated Payment Mortgage (GPM) was a VA home loan option that offered lower initial monthly payments than a standard fixed-rate mortgage. Those payments then increase annually for a set period before leveling off for the remainder of the loan term.

The lower starting payments are made possible by deferring a portion of the interest due each month during the early years of the loan. That deferred interest is added to the principal balance, a process known as negative amortization. Once the graduation period ends, monthly payments stop increasing and remain fixed.

GPMs are often confused with Growing Equity Mortgages (GEMs). While both involve payment adjustments, they work in opposite ways. A GPM delays interest and increases the loan balance early on, while a GEM requires higher early payments that reduce principal faster and build equity more quickly.

How VA Graduated Payment Mortgages Worked

When VA GPMs were available, they followed a structured payment schedule that gradually increased payments over time.

Under VA guidelines:

• Monthly payments increased 7.5% per year for the first five years
• Payments became fixed in year six and stayed level for the remainder of the loan term

Although initial payments were lower, borrowers still had to qualify for the higher future payment amount, not just the introductory payment. This ensured veterans could realistically afford the loan once payments stabilized.

Who VA GPMs Were Designed For

According to the VA Lender’s Handbook, Graduated Payment Mortgages were intended for veterans whose financial situation was expected to improve over time.

These loans were considered appropriate for:

• Veterans with income expected to increase enough to support higher future payments
• Borrowers whose current income was already sufficient to handle the payment once it leveled off

Who VA GPMs Were Not Recommended For

The VA advised lenders not to offer GPMs to borrowers who could not qualify for a standard VA mortgage unless there was a reasonable expectation of future income growth that aligned with the scheduled payment increases.

Property and Usage Restrictions

VA Graduated Payment Mortgages came with strict property and usage limitations. These loans could only be used to purchase:

• A single-family home
• A property that would serve as the borrower’s primary residence

VA GPMs could not be used for:

• Multi-unit properties
• Manufactured homes
• Refinancing existing loans
• Repair-only, alteration-only, or improvement-only purposes

Down Payment Requirements

Unlike most VA loans, Graduated Payment Mortgages required a cash down payment. This requirement existed to prevent the loan balance from exceeding the home’s value during the negative amortization period.

Existing Construction Homes

For existing homes, a down payment was required to ensure the loan balance would never exceed the property’s initial reasonable value as determined by the VA appraisal.

New Construction or Never-Occupied Homes

For new construction and existing homes that had never been occupied:

• The initial loan amount could not exceed 97.5% of the lesser of the purchase price or appraised value
• The borrower was required to cover the difference with a cash down payment from personal funds

In addition, VA rules allowed the initial VA GPM loan amount to be increased by the VA funding fee (if financed) and the cost of eligible energy efficiency improvements under the VA Energy Efficient Mortgage (EEM) program, provided the total loan balance did not exceed the projected value of the property. Keep in mind that if you are receiving VA disability compensation payments, then you are exempt from the VA funding fee.

Loan Value Limits and Appraisal Rules

VA Graduated Payment Mortgages were subject to strict loan value and appraisal rules designed to limit risk during the negative amortization period. Under VA guidelines, the principal balance of a VA GPM could never exceed the projected value of the property at any point during the loan term, even as deferred interest was added to the loan balance in the early years.

The VA appraisal was central to enforcing these limits. After completing the appraisal, the VA issued a Notice of Value (NOV) that established the home’s initial reasonable value. The initial loan amount—and any future increases caused by deferred interest—had to remain within the boundaries set by this valuation. In addition, properties financed with a VA GPM were required to have a remaining economic life of at least 30 years, as determined by the VA appraisal, to ensure the home could support the loan for its full term.

Refinancing a VA GPM

Although VA Graduated Payment Mortgages could not be used to refinance other existing loans, borrowers were permitted to refinance a VA GPM once they already had one. This gave veterans a potential exit strategy once their income stabilized or interest rates became more favorable.

VA rules allowed a GPM to be refinanced into a standard fixed-rate VA loan or through a VA Streamline Refinance (IRRRL), provided the refinance resulted in a tangible benefit to the borrower. Examples of tangible benefits included lower interest rates, more stable monthly payments, and other clear financial improvements.

Borrower Disclosures

VA borrowers were required to acknowledge, in writing, the unique risks associated with Graduated Payment Mortgages before closing. This disclosure ensured borrowers understood that their monthly mortgage payments would not remain static during the early years of the loan.

Specifically, borrowers had to sign a statement confirming that payments would increase annually for five years and identifying the exact percentage of each increase. If the loan’s interest rate changed after the initial disclosure was signed, the VA required an amended statement to be prepared, signed by the borrower, and included in the final loan closing package.

Applying for a VA GPM (When Available)

When VA Graduated Payment Mortgages were still offered, the application process largely mirrored that of a standard VA home loan. Borrowers were required to obtain a Certificate of Eligibility (COE) verifying their VA loan entitlement and then complete the lender’s full credit underwriting process.

Applicants still needed to meet lender requirements for credit score, income, employment history, and debt-to-income ratio. In addition, not all VA-approved lenders offered GPMs, and many imposed lender overlays beyond VA minimum standards. As a result, borrowers often needed to shop among participating lenders to find one willing to offer a VA GPM based on their financial profile.