Home buyers and homeowners have been waiting patiently for the FHA 40-year mortgage loan to be introduced to the financing market. During the COVID-19 pandemic, millions of people lost their jobs or had hours cut when the federal government encouraged lockdowns to reduce the spread of the virus. When that happened, many homeowners fell behind on their mortgage payments, but this problem was temporarily mitigated with Fannie Mae, Freddie Mac, and FHA mortgage forbearance programs.
FHA estimates that more than one million FHA mortgage holders were in forbearance, but most have exited since January 2021. From January 2021 through February 2022, FHA loan providers have finished more than one million loss mitigation home retention plans.
For up to 12-18 months, some homeowners were able to suspend their payments during the pandemic. However, the forbearance programs are coming to an end, and homeowners behind on their payments need to set up a repayment plan to catch up on past-due payments.
A common option is to reduce the principal due on the mortgage, combined with a lower interest rate. However, interest rates are rising in April 2022, with rates for 30-year mortgages near 5%.
Higher rates make it more difficult for loan modifications that are affordable for people behind on their payments. But FHA is leading the way on loan modifications with a new program that could promise affordable payments for millions of Americans.
New FHA 40-Year Loan Option Now Available
FHA announced this month that it will offer a 40-year mortgage modification option to help borrowers who are behind on their mortgages. This new FHA mortgage 40-Year option could be a good fit for homeowners who cannot attain a 25% reduction in the P&I portion of their home loan payment through the current FHA 30-year mortgage modification option.
The proposed rule was released in the Federal Register on April 1. If approved, the program will allow FHA mortgage providers to offer a 40-year FHA loan modification option for people who are struggling to make their mortgage payments after being in COVID-related mortgage forbearance.
Mortgage services, however, are allowed to offer the 40-year option right away and need to offer it as an option to people who are eligible with an FHA-backed Title II forward mortgage.
Options available with the 40-year mortgage program for FHA-backed Title II forward mortgages include:
COVID-19 Recovery Standalone Partial Claim
For FHA borrowers who can make their current payments, the standalone partial claim lets the mortgage arrears be put in a 0% lien against the home. The partial claim money does not need to be paid until one of these happens:
- The FHA mortgage matures
- The home is sold
- The loan is paid off
- FHA insurance is terminated
COVID-19 Recovery Modification
For FHA borrowers who cannot afford their monthly payments, this recovery modification will resolve the outstanding arrears by adding it to the principle of the first FHA mortgage. The servicer will extend the term for 30 years at a rate that is no more than the current market rate. Also, the loan can be extended to 40 years at a rate that is no more than 50 basis points more than the current market rates.
Why a 40-Year Mortgage?
Some people may not understand why FHA is offering a 40-year mortgage. After all, isn’t it a bad idea to have a home loan that goes for that long?
That is a valid point, but bear in mind that when the pandemic hit, unemployment soared to almost 15%. Thousands of businesses shut down temporarily or permanently and more than seven million borrowers went into forbearance programs. That number has dropped a lot, but there are still at least one million people in forbearance with limited options.
The rule changes allowing 40-year mortgages give mortgage companies more tools to prevent foreclosures that are avoidable. It also gives FHA borrowers time to evaluate what they will do after their forbearance ends.
Some in the industry note that without forbearance and loan modifications, including with FHA 40-year loans, there could be millions of home foreclosures. This could deliver a devastating blow to the US economy and would take billions of dollars of wealth from vulnerable communities across the nation.
What To Know About 40-Year Mortgages
Let’s take a closer look at the 40-year FHA mortgage and how it differs from a 30-year loan:
- The term is 10 years longer. This seems obvious but remember you will pay interest for 10 more years and that is usually tens of thousands of dollars more. Most experts say do the 40-year option if you must for now, but refinance as soon as you can.
- The payment will be lower. You have 10 more years to pay the loan, so it would take a big spike in the interest rate not to reduce the payment a lot.
- You’ll pay a lot more in interest. A 40-year loan will cost you a lot more over the lift of the loan.
- There could be a higher interest rate. Most mortgage investors don’t buy 40-year loans, so you may need to pay a higher rate and more fees.
Let’s look at an example:
If you have a $225,000 loan on a $250,000 home and have 4% interest, you will pay $940 per month on your 40-year loan. Total interest will be $226,000. But on a 30-year loan, you will pay $1075, but only pay $161,000 in interest. As you can se, you will pay more than $60,000 in additional interest.
So, while getting a 40-year mortgage can be smart to avoid foreclosure, it’s going to cost you in the long run. More of your monthly payment will be paying interest. Plus, your equity builds slower. This is the amount of the home that you own outright. The more home you own, the less you are paying interest on.
If you want to refinance, it could be a problem if you only put down 5% or 10% when you bought the house. You need to have about 20% in equity to do most refinances. The FHA 40-year long has costs, but it can be a great option for people who risk going into foreclosure.
7 Reasons why 40 Year Mortgage Loans Are Looking Good.
When you are thinking about a mortgage and buying a home, it’s smart to review all options. One of the loan choices that is gaining more attention is the 40-year mortgage. A 40-year mortgage has lower payments than a 30-year or 15-year mortgage. This fact can help you afford a home that is more expensive or make the mortgage more affordable. While there are advantages and disadvantages of a 40-year mortgage, there is no question they are becoming more popular as home values rise.
Below are more things to know about these loans and why they could be a good fit for your needs.
Some Lenders Offer 10-Year Interest Only
One way some lenders offer 40-year mortgages is like this: You pay 10 years interest only with lower payments, then 30 years paying principal and interest. This is a way you can have lower payments when you are making less money. Then, after you have had raises and promotions, you can move into the interest and principal portion of the mortgage for 30 years.
Some Lenders Offer Variable Rates
There also are lenders that offer variable rates on 40-year mortgages. You can get a loan that may be fixed for five years and then reset into a fixed rate for the rest of the loan.
Fixed Rates Available
Interest rates on mortgages are still low in 2022, but they are likely to rise soon as the Fed is planning to raise rates several times this year. You can get a low, fixed-rate mortgage that lasts for 40 years but you will need to act soon to lock in low rates.
More Lenders Offer 40-Year Mortgages
It’s more possible today than a few years ago to get a 40-year mortgage. While not every lender offers them yet, they are becoming more known because home values have risen dramatically in the last two years.
Sometimes it is easier to extend a 30-year mortgage to 40 years, if you are having difficulty with the payments. It is possible to extend some loans to 40 years that are backed by Freddie Mac, Fannie Mae, FHA and VA.
More Purchasing Power
If you have noticed, home prices have shot up 20% or more in the last year in many cities across America. This fact makes it harder for millions of people to afford a home.
But with a 40-year mortgage, you may be able to have lower monthly payments so you can buy a home.
Can Refinance into A Shorter Mortgage
A new strategy for some borrowers who have a lower income is to get a 40-year mortgage with a lower payment for a few years.
If they expect their income will rise in three or five years, they can refinance their mortgage into a 15 year or 30-year loan. This allows them to take advantage of lower payments for a while but then increase payments when they make more money.
You Can Pay It Off Anytime
Remember that whether you have a 30-year or 40-year mortgage, you may be able to pay it off sooner than you think. People’s financial situations change over many years.
Even if you take out a 40-year loan today, you may be able to either refinance it or pay it off after 20 or 25 years.
Good Option for Short-Term Borrower
Let’s say you are sure that you will buy your home, keep it for two or three years, and sell it and move somewhere else. In this situation, it can make sense to have the lowest possible payment.
A common situation is someone in the military who knows they will be in the home for only two years. It may be logical to have a lower monthly payment and put the extra money into something else.
Possible Tax Write Offs for Wealthy Borrower
If you have a high income, it can make sense to pay more interest on the home to write off more on your taxes.
You will pay more interest with a 40-year mortgage, and if you itemize your taxes, you may have a lot more deductions.
Now that you know more about the pluses of 40-year mortgages, you should remember a few things.
First, you will probably pay a slightly higher interest rate. Lenders raise the rate on longer mortgages because of the higher risk.
Second, you will pay more interest with a 40-year loan, so you should crunch the numbers to make sure it makes sense for your financial situation.
Third, a 40-year mortgage builds equity slower because a lot of the payments go towards interest. If you intend to stay in the home for the entire term, then it’s fine. But if you want to sell the home, it may not have as high a price.
There’s little doubt that a 40-year mortgage is more possible today than a decade ago. However, you should review the loan carefully with your mortgage lender.
You will spend more money on your home if you take 40 years to pay the debt. While the monthly payments are lower, the interest payments are higher.
However, a 40-year loan can be a good idea for some borrowers with a lower income and a high credit score. It also can be a good fit for people who want to get into a larger or more expensive home.
So talk to your lender soon about a 40-year mortgage to find out if you qualify.
Takeaway on FHA 40-Year Loans
Getting a 40-year FHA mortgage may not be the ideal solution, but if it helps people avoid foreclosure, it could be worth considering. After all, there isn’t anything worse than foreclosure and losing the home.
So, if getting a longer mortgage makes payments more affordable and reduces the chances of foreclosure, it may be a good move. Plus, you can always refinance the loan later when your situation improves (if you have enough equity), so talk to your mortgage lender about a 40-year FHA loan today.