The Ins and Outs of 40 Year FHA Loans

The 40 year FHA loan is a relatively new offering that is changing the mortgage game for many borrowers. With high home prices and rising interest rates, this extended loan term can provide much-needed affordability for homebuyers as well as existing homeowners looking to refinance.

In this comprehensive guide, we’ll walk through everything you need to know about 40 year FHA loans including

• What is a 40 year FHA loan?
• How it compares to a 30 year loan
• Pros and cons
• Eligibility requirements
• Interest rates
• How to qualify
• The application process
• Tips for getting approved

Let’s get started!

What is a 40 Year FHA Loan?

A 40 year FHA loan is an insured mortgage backed by the Federal Housing Administration (FHA) with a total loan term of 40 years or 480 months.

The FHA introduced the 40 year option in early 2022 to help provide more affordable monthly payments to borrowers struggling to afford rising home prices and interest rates. Previously, the maximum loan term for FHA loans was 30 years or 360 months.

By extending the repayment period by another 10 years, monthly mortgage payments are decreased significantly compared to a 30 year loan, making homes more affordable, especially in high cost areas

These loans are ideal for:

• First-time homebuyers trying to keep payments low
• Existing FHA borrowers looking to refinance into a lower monthly payment
• Homeowners needing to lower payments to avoid foreclosure

40 year FHA loans share the same benefits and requirements of the popular 30 year FHA program but with even more manageable payments stretched out over a longer timeline.

How Does a 40 Year FHA Loan Compare to a 30 Year Loan?

The main difference between a 30 year and 40 year FHA loan is the length of the loan term and therefore the monthly mortgage payment amount.

Loan Term

• 30 year FHA loan = 360 months
• 40 year FHA loan = 480 months

Monthly Payments

Since you are paying off your loan over an additional 120 months, the monthly mortgage payments on a 40 year loan will be significantly lower than a 30 year loan of the same loan amount.

For example, on a $300,000 loan amount at a 6% interest rate:

• 30 year loan payment = $1,798
• 40 year loan payment = $1,552

That’s a savings of $246 per month on your mortgage payment simply by extending the term another 10 years.

The longer term allows you to stretch out repayment over more time resulting in a lower payment. This improved affordability is the biggest benefit of 40 year FHA loans.

Amount of Interest Paid

While you save on the monthly payment, choosing a 40 year loan means you will pay more interest over the full loan term compared to a 30 year loan.

In the above example, you would pay $577,000 in total interest on the 40 year loan vs $479,000 on a 30 year loan. The extra 10 years of payments adds to the total interest.

So in exchange for a lower monthly payment, you ultimately end up paying the lender more interest over the life of the 40 year loan.

The Pros and Cons of a 40 Year FHA Loan

Below we’ve summarized the key pros and cons you need to know to decide if a 40 year FHA loan is your best mortgage option.

Pros

Lower monthly payments – The #1 advantage is more affordable payments, making qualifying easier.

FHA-backed – These loans are insured by the FHA, so they offer low down payments and more flexible credit.

Refi option – Existing FHA borrowers can refinance into a 40 year loan to lower their payment.

Build equity – Even with the longer term, you still build home equity with each payment made.

Lower payment-to-income ratio – Lower DTI requirements to qualify for the loan with the smaller monthly payment.

Cons

More interest paid – You’ll pay significantly more total interest over the 40 year term.

Slower equity building – Equity will build more slowly over the longer loan period.

Potentially more fees – Closing costs may be higher compared to a 30 year loan.

Higher interest rate – Interest rates are typically 0.25% – 0.5% higher for 40 year loans.

Less predictable market – Hard to predict home values and interest rate fluctuations over 40 years.

While it does cost more overall, the 40 year FHA loan can still make sense for some borrowers who need to lower their monthly payments above all else.

FHA Loan Requirements

To qualify for a 40 year FHA loan, you must meet all the standard FHA eligibility requirements:

• Credit score – At least 580 minimum FICO score for maximum financing; 500-579 scores allowed but with higher down payment.

• Down payment – At least 3.5% down payment required. Can be gifted. Seller can pay up to 6% towards closing costs.

• Debt-to-income ratio – Typically allowable DTI is 43-50%. Lower monthly payments help borrowers meet DTI requirements more easily.

• Cash reserves – Must have 2-6 months of mortgage payments in reserves after closing. Gift funds allowed.

• Homebuyer education – At least one borrower must complete an FHA-approved homebuyer education course if you are a first-time buyer.

• Owner occupancy – You must make the home your primary residence. No vacation homes or investment properties.

• First-time homebuyer – First-time buyers typically have an easier time qualifying for FHA loans than repeat buyers.

• Home eligibility – Must be a single-family home or eligible condo unit. Manufactured homes also OK. Home must be in good condition.

The 40 year term option does not change any of the standard FHA loan eligibility guidelines above. The same qualifications apply.

Meeting income and debt-to-income requirements is often easier, however, with the 40 year term since your monthly mortgage payment used to calculate your DTI is lower than with a 30 year loan.

Current Interest Rates on 40 Year FHA Loans

Interest rates on 40 year FHA loans are typically 0.25 – 0.5% higher than 30 year loan rates. Here are some current sample interest rates:

• 30 year fixed rate: 6%
• 40 year fixed rate: 6.25% to 6.50%

So expect to pay a slight premium on your interest rate for the longer 40 year payoff. Even with the higher rate, the lower monthly mortgage payment makes qualifying easier for many borrowers compared to 30 years.

Interest rates for 40 year FHA loans will rise and fall over time just like rates for other loan products. Rates are impacted by:

• The federal funds rate set by the Federal Reserve
• Overall bond market performance
• Lender competition

When mortgage rates decrease, it could be a good opportunity to lock into a 40 year FHA refinance. When rates trend higher, the extended term helps keep payments affordable.

How to Qualify for a 40 Year FHA Loan

Qualifying for a 40 year FHA loan follows similar guidelines as other FHA loans. Here are some tips for getting approved:

• Get your FICO score to at least 580 – Pay down debts, dispute errors to boost your credit score.

• Lower your DTI – Reduce monthly debts and leverage the lower 40 year payment when calculating your DTI.

• Save for a down payment – Shoot for at least 3.5% of the purchase price.

• Gather 2-6 months reserves – Have 2-6 months of mortgage payments available in your accounts.

• Take a homebuyer education course – At least one borrower must complete education if you are a first-time buyer.

• Choose an eligible property – Stick to single-family homes and condos that meet FHA criteria.

• Get pre-approved – Lock in a 40 year pre-approval letter to strengthen offers.

• Compare mortgage lenders – Shop around with lenders familiar with 40 year FHA loans. Get multiple loan estimates.

With some preparation, 40 year FHA financing can be an affordable way for many borrowers to qualify for a mortgage.

How Do You Apply for a 40 Year FHA Loan?

Here is an overview of the application and approval process:

1. Review loan options – Decide if a 40 year FHA loan is right for your needs and budget. Consider 30, 20, 15 year terms too.

2. Check rates and get pre-approved – See today’s rates from multiple lenders and select one to get a pre-approval letter with estimated 40 year payment.

3. Make an offer – Make an offer on a home you like with confidence knowing you are pre-approved.

4. Get fully approved – Once offer is accepted, complete full application,