Everything You Need To Know About 40 Year Conventional Loans

A 40 year conventional loan is an increasingly popular mortgage option that allows borrowers to stretch their payments over a longer period of time. With a 40 year term, monthly payments are lower compared to a traditional 30 year mortgage. However, you end up paying more interest over the life of the loan

In this comprehensive guide, we’ll explain what a 40 year conventional loan is, the pros and cons, interest rates, eligibility requirements, and how to get one.

What Is A 40 Year Conventional Loan?

A 40 year conventional loan is a fixed-rate mortgage with a term of 40 years. The most common mortgage terms are 15 and 30 years. But some lenders offer loans with longer repayment periods like 40 years.

With a 40 year conventional loan, you make lower monthly payments over a longer timeframe. This results in paying more interest over the life of the loan compared to shorter terms.

These loans are considered “conventional” because they conform to guidelines set by Fannie Mae and Freddie Mac. This makes them different from government-insured loans like FHA VA, and USDA mortgages.

How Do 40 Year Conventional Loans Work?

A 40 year conventional mortgage works similarly to other fixed-rate loans. You pay a fixed interest rate and fixed principal and interest payment each month for the term of the loan. Here are some key points:

• Loan term is 40 years (480 monthly payments)
• Interest rate is fixed for the full 40 years
• Monthly payment of principal and interest stays the same
• Payments consist of more interest and less principal compared to shorter terms
• Higher total interest paid over loan life
• Loan can be paid off early with no penalties

Amortization is slower over 40 years, so more of your payment goes to interest This means you build equity at a slower pace.

Pros And Cons Of 40 Year Conventional Loans

Here are the main advantages and disadvantages of choosing a 40 year conventional mortgage:

Pros

• Lower monthly payments – Spreading payments over 40 years results in a lower monthly cost compared to 30 and 15 year loans. This improves affordability.

• May qualify for a larger loan amount – The lower monthly payments may allow you to qualify for a bigger mortgage loan because less income is required.

• Flexibility if money is tight – The smaller payments provide flexibility in your budget if money is tight.

Cons

• Higher interest costs – You’ll pay significantly more interest over the 40 year term because you’re borrowing for a longer time.

• Slower equity buildup – More of your payment goes toward interest, so you build home equity slower compared to shorter terms.

• Risk of not paying off mortgage – There’s a chance you may reach retirement age with mortgage debt still owed if payments are only made for 40 years.

• Difficulty refinancing – Since 40 year mortgages are less common, they can be harder to refinance once rates decline.

What Are Current 40 Year Conventional Loan Rates?

Interest rates on 40 year conventional mortgages are typically 0.25% to 0.5% higher than comparable 30 year fixed rates. Here are some sample rates from major lenders:

• Quicken Loans: 6.25% APR for 40 years
• loanDepot: 6.375% APR for 40 years
• Freedom Mortgage: 6.5% APR for 40 years

So while the monthly payments are lower, you pay for it with a higher interest rate over the loan term.

Who Is Eligible For A 40 Year Conventional Loan?

The eligibility criteria for 40 year conventional mortgages are similar to other conventional loans backed by Fannie Mae and Freddie Mac. Here are some key requirements:

• Minimum credit score of 620
• Stable income and employment history
• Monthly debt-to-income ratio typically below 50%
• Enough cash for down payment and closing costs
• Loan amounts up to $970,800 allowed

While guidelines are similar, note that fewer lenders offer 40 year loans. So shop around to find a lender willing to approve a longer term.

How To Get Preapproved For A 40 Year Conventional Loan

Getting preapproved for a 40 year conventional mortgage involves these steps:

• Check credit reports and scores to fix any errors – Lenders will evaluate your creditworthiness.

• Gather financial documents – Tax returns, pay stubs, and bank statements will be required to confirm your income and assets.

• Pick a lender – Compare mortgage lenders to find one that offers 40 year loans and good rates.

• Complete a loan application – Provide information on income, employment, assets, debts, and property.

• Get preapproved – The lender will analyze your information and issue a preapproval letter if you qualify.

Getting preapproved shows sellers you are a serious buyer and can make a strong offer.

Alternatives To A 40 Year Conventional Mortgage

If you want lower monthly payments but are concerned about higher interest costs, consider these options:

• 30 Year Fixed-Rate – Still enjoy low payments but pay off the loan faster.

• Adjustable-Rate – Take advantage of lower intro rates while preparing to refinance later.

• Paying Points – Pay a fee upfront to lower your interest rate.

• Down Payment Grants – Qualify for programs that provide down payment assistance. Borrowing less reduces monthly costs.

• 15 Year Mortgage – Get a shorter term to build equity faster and pay less interest.

The Bottom Line

While uncommon, 40 year conventional loans allow borrowers to obtain lower monthly payments by extending the repayment period way beyond the normal 30 years. However, the trade-off is higher interest costs over the long run and slower equity buildup.

If you need the smaller monthly payment, make sure you’re comfortable paying off your home well into retirement. Otherwise, a 30 year term or adjustable-rate mortgage may be better options to consider.