Everything You Need To Know About FHA Loans With 40-Year Terms

The FHA recently announced that it will start backing mortgages with 40-year loan terms. This new option aims to help struggling homeowners lower their monthly payments and avoid foreclosure. Here is everything you need to know about FHA loans with 40-year terms.

What is an FHA Loan?

FHA loans are government-backed mortgages insured by the Federal Housing Administration. To qualify for an FHA loan, you only need a minimum credit score of 580 and a down payment as low as 3.5%. These lenient requirements make FHA loans more accessible for first-time homebuyers and buyers with lower credit scores.

The government insures FHA loans protecting lenders from losses if a borrower defaults. This allows lenders to offer mortgages to buyers who may not qualify for conventional loans. FHA loans feature low down payments flexible credit requirements, and low mortgage insurance premiums.

Overview of the New 40-Year FHA Loan Term

Typically, FHA loans come with either 15 or 30-year terms. But starting October 1 2021 the FHA will insure some mortgages with 40-year loan terms. This new extended term only applies to loan modifications for certain FHA borrowers already facing hardship.

The 40-year option aims to help homeowners who can no longer afford their mortgage payments avoid foreclosure. By adding 10 more years to the loan repayment period, monthly payments are reduced significantly.

For example, on a $250,000 mortgage at 3% interest, monthly payments on a 30-year loan would be around $1,265 Extending to a 40-year term would drop the monthly payment to around $984, a savings of $281 per month

The 40-year term offers payment relief, allowing homeowners to keep their house while managing a lower monthly payment over a longer period.

Who Qualifies for a 40-Year FHA Loan?

The 40-year mortgage term is only available for existing FHA borrowers facing financial hardship who qualify for a loan modification. It is not an option for new home purchase mortgages.

To qualify for the 40-year modification, certain criteria must be met:

• You must have an existing FHA mortgage. This excludes conventional loans or mortgages backed by other government programs like the VA or USDA.

• Your mortgage must have an outstanding term greater than 30 years but less than 40 years. For example, if you have 20 years left on your mortgage, you would not be eligible.

• You must be facing default on your mortgage payments due to hardship. The 40-year modification is intended to prevent foreclosure.

• There are no specific income limits or credit score requirements beyond standard FHA modification eligibility.

Overall, the 40-year product aims to help current FHA borrowers who are struggling to make their monthly payments. Talk to your mortgage servicer if you are having trouble making payments on your FHA loan, as this new option may help you avoid foreclosure.

How Do I Qualify for an FHA Loan Modification?

To be eligible for a loan modification that could extend your mortgage to a 40-year repayment term, there are a few general qualification requirements:

• You must have had an income loss or reduction. This could be due to job loss, reduced wages, divorce, medical bills, etc.

• You must occupy the home as your primary residence. Investment properties or second homes do not qualify.

• You must lack sufficient income/assets to cover the current mortgage payment.

• Your mortgage must be 31+ days delinquent or you have experienced multiple periods of 15-day delinquency in the past 6 months.

• You must lack resources to bring the loan current or fully repay the mortgage.

In addition to these requirements, you will need to provide financial information to your mortgage servicer, such as bank statements, pay stubs, tax returns, and a hardship letter explaining your circumstances.

The servicer will evaluate your situation based on FHA eligibility requirements and determine if a mortgage modification makes sense. If so, they may then extend your repayment term to 40 years to make the monthly payment affordable.

What Are the Benefits of a 40-Year FHA Loan?

The main benefits of the 40-year loan term include:

Lower Monthly Payment – Extending the repayment period by 10 years significantly reduces the monthly mortgage payment. This decreases the risk of missed or late payments for struggling borrowers.

Avoid Foreclosure – The lower payment provides temporary payment relief and allows homeowners to avoid foreclosure. This helps maintain continuity of housing.

Longer Time to Repay – Having a longer repayment term allows homeowners more time to recover from financial hardship and improve their situation.

Flexible Requirements – Beyond standard FHA eligibility, there are no other credit or income requirements to qualify for the 40-year modification.

Easier Process – Loan modifications require less paperwork than refinancing and can be completed more quickly.

The longer term offers a simpler, fast option to avoid foreclosure. While the total interest paid over the life of the loan increases significantly, the 40-year term provides short-term relief for FHA borrowers facing hardship.

What Are the Drawbacks of a 40-Year Mortgage?

Despite the benefits, 40-year mortgage terms also come with some potential downsides:

• More Interest Paid – By adding 10 more years of payments, you pay a significant amount of additional interest over the life of the loan.

• Limited Options to Refinance – Even if your finances improve later, refinancing a 40-year mortgage will be more difficult compared to a 30-year term.

• Potentially Riskier – Paying a mortgage for 40 years carries more risk of personal hardship making payments before the loan is paid off.

• Difficulty Building Equity – With slower equity accumulation over 40 years, it may also be more difficult to qualify for a refinance.

• Higher Total Costs – In addition to more interest, the longer repayment term leads to higher total costs for property taxes, insurance, and maintenance.

While these factors may make 40-year mortgages seem unfavorable, for those facing the threat of foreclosure and needing immediate monthly payment relief, the benefits likely outweigh the drawbacks.

How Do I Apply for a 40-Year FHA Loan Modification?

If you are an existing FHA borrower struggling to make payments, here are the steps to take in applying for a 40-year modification:

1. Contact your mortgage servicer – This is the company you make your monthly payments to. Explain your financial hardship and that you are interested in mortgage modification options.

2. Gather required documents – Your servicer will provide a list of documents needed, such as bank statements, tax returns, income statements, and hardship letter.

3. Complete modification application – Work with your servicer to fill out the official mortgage modification paperwork.

4. Get modified loan terms – After reviewing your application, the servicer will provide the details on your modified FHA loan over a 40-year term.

5. Sign modification agreement – Once the new loan terms are agreed upon, you’ll sign a modification agreement finalizing the new 40-year mortgage.

The process is simpler than a traditional refinance and does not require appraisals, credit checks, or home inspections. Work closely with your servicer if you are struggling to make mortgage payments. The new FHA 40-year product could help you keep your home.

Alternatives to a 40-Year FHA Modification

If you don’t qualify for a 40-year FHA modification, here are a few alternatives that may help:

• Forbearance – You may be able to temporarily pause or reduce mortgage payments for up to 12 months.

• Repayment Plan – Set up a repayment schedule with your servicer to catch up on missed payments over time.

• Loan Modification – Adjust loan terms besides the length, such as interest rate or principal balance reduction.

• Partial Claim – Receive an interest-free second mortgage from HUD to bring account current.

• Short Sale – Sell your home for less than mortgage balance owed and receive forgiveness for the deficiency.

• Deed-in-Lieu – Voluntarily transfer ownership of the property over to the servicer to avoid foreclosure.

If you have an FHA-insured mortgage and can no longer afford payments, be sure to discuss all options with your mortgage servicer and housing counselor. Acting early gives you the best chance to keep your home. Carefully evaluate the pros and cons of each method to find the solution that best fits your needs.

The introduction of FHA’s new 40-year mortgage term serves as a way to help struggling homeowners stay in their house by providing a lower monthly payment. While extending the repayment period results in higher total interest costs, the benefit of avoiding foreclosure often makes it a preferred option for those facing financial hardship.

However, a 40-year mortgage has its drawbacks and is not ideal for everyone. Work closely with mortgage professionals to fully understan