The FHA (Federal Housing Administration) recently announced that it will allow lenders to offer 40-year mortgage terms for FHA-insured loans. This is an increase from the previous 30-year maximum term. Many borrowers are wondering – are there 40 year FHA loans now? Here is what you need to know:
What Is An FHA Loan?
The FHA does not actually lend money directly to borrowers. Instead, it insures mortgages issued by FHA-approved lenders against default. This makes it less risky for lenders to provide mortgages to buyers who may not qualify for conventional loans. FHA loans typically require lower down payments and credit scores than conventional mortgages.
FHA Now Allows 40 Year Loan Terms
Previously, FHA guidelines limited the maximum term on FHA-insured mortgages to 30 years (360 months). However, in May 2023, the FHA announced a policy change allowing lenders to offer 40-year terms, up from the previous 30-year limit.
This change gives lenders more flexibility to help struggling homeowners reduce their monthly payments and avoid foreclosure The FHA cited rising interest rates and the potential for increased unemployment as reasons for allowing the longer 40-year term
Not All Lenders Offer 40 Year FHA Loans
While the FHA now allows 40-year loan terms it is up to each individual FHA-approved lender to decide whether they will actually offer this option. The FHA itself does not provide or originate 40 year loans.
So just because the FHA permits 40 year terms, it does not mean you will necessarily find a lender offering a 40 year FHA-insured mortgage. Lenders have the choice of whether to offer the maximum 40 year term or stick with shorter terms like 30 or 15 years.
As of May 2023, 40 year FHA loan options are still scarce. But availability may increase as more lenders adopt the new 40 year guidance.
40 Year FHA Loans Used Mainly For Distressed Borrowers
The main purpose of allowing longer 40 year FHA loan terms is to help existing FHA borrowers who are in financial hardship reduce their monthly payments and avoid foreclosure,
By extending the repayment period from 30 years to 40 years, monthly principal and interest payments can be lowered significantly, making mortgages more affordable for struggling homeowners.
For new homebuyers who qualify for normal 30 year loan terms, 40 year FHA mortgages don’t offer much benefit. The longer term means paying more interest over the life of the loan.
How Much Can 40 Year FHA Loans Reduce Payments?
For existing homeowners facing hardship, modifying a 30 year FHA mortgage to a 40 year term could potentially reduce monthly principal and interest payments by around 25%.
However, because rates are much higher now than a few years ago when many of these loans were originated, the actual savings may be less substantial.
For example, modifying a $300,000 loan from a 3.5% 30 year term to a 6.5% 40 year term would lower the monthly payment from $1,432 to $1,370 – just a 4.4% reduction.
Still, for distressed borrowers every bit of payment relief helps. And in cases of larger loan balances, the monthly savings could be more significant.
Alternatives To 40 Year FHA Loan Modifications
Before jumping into a 40 year FHA loan modification, struggling homeowners should also consider other options:
-
Refinancing – If borrowers can qualify for today’s rates, refinancing into a new 30 year loan at a lower rate may provide more savings than extending to a 40 year term at a higher rate.
-
Forbearance – FHA provides forbearance programs to temporarily reduce or suspend payments for those with COVID-related hardship.
-
Partial claim – An interest-free loan from the FHA to bring a delinquent loan current without having to modify the original mortgage.
-
FHA-HAMP – An FHA modification program to make loans more affordable by lowering rates, extending terms to 40 years, and/or deferring principal.
The key for distressed FHA borrowers is to explore all modification and relief options with their lender to find the best solution.
Requirements For 40 Year FHA Loan Modifications
To be eligible for a 40 year FHA mortgage modification, the basic requirements are:
-
Must be an existing FHA-insured mortgage holder
-
Experiencing documented financial hardship and inability to pay
-
Must state that they can make the new modified monthly payment
No specific documentation is needed upfront. The lender will verify eligibility.
Pros Of 40 Year FHA Loan Modifications
Potential benefits of modifying an FHA loan to a 40 year term include:
- Lower monthly payments to improve affordability
- Helps avoid foreclosure and retain homeownership
- Maintains low FHA interest rate on original loan
- No limit on how many times an FHA loan can be modified
- May require no appraisal or credit check
Cons Of 40 Year FHA Loan Modifications
Disadvantages of 40 year FHA modifications include:
- Much higher interest paid over loan life
- Slower equity buildup compared to 30 year term
- Missed opportunity to refinance into lower rate
- Limited availability from lenders currently
Overall, the new 40 year FHA loan modification option gives lenders an additional tool to help struggling homeowners retain their properties. But it is not a blanket program – 40 year FHA mortgages will only be available on a case-by-case basis from participating lenders. Distressed borrowers should work closely with their lenders to determine if this option suits their situation.
Why most homeowners should stay clear of a 40-year mortgage
For borrowers looking to buy a home, a 40-year loan isnt a good option because the savings wont always outweigh the risks. “Frankly, I cant imagine a situation where on a purchase I would recommend somebody doing that,” says Elizabeth Rose, a certified mortgage planner and loan originator with 26+ years of experience in the mortgage industry.
Lets use a $350,000 home purchase with a 20% down payment ($70,000) as an example of why the lower monthly payment isnt worth taking on this loan type.
In that scenario, the buyer needs a $280,000 mortgage. For a 30-year loan at 6.85%, the total interest the borrower pays over the life of the loan would be $380,501. That number jumps by over $174,000 to $555,204 with a 40-year loan at 7%. The 40-year loan does have a smaller monthly payment and would save the borrower $95 a month, but youre paying almost $175,000 more in interest.
Youll also build equity in your home much more slowly with a 40-year loan. Using the numbers from the example above, the remaining balance on the 30-year loan would be just under $240,000 after making regular payments for 10 years. With the 40-year loan, the borrower would have a balance of over $261,000 after 10 years.
Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here.
Our top picks of timely offers from our partners
The offer of a lower monthly mortgage payment would tempt any homeowner, and thats exactly what a 40-year mortgage promises. By tacking on an extra decade to the standard 30-year mortgage, this loan type leads to lower monthly payments because you have more time to pay off the loan. But the amount of interest youll pay over the loans lifetime makes a 40-year mortgage a bad choice unless youre otherwise at risk of defaulting on your existing mortgage.
If youve heard about a 40-year mortgage and are wondering if it can help you afford a home, heres what you need to be aware of first.
FHA approved 40-year mortgage for homebuyers in May
FAQ
Does FHA offer a 40 year mortgage?
What is the longest term FHA loan?
Is there such a thing as a 40 year mortgage?
Is there such a thing as a 50 year mortgage?
Do FHA loan borrowers have a 40-year option?
FHA loan borrowers have access to a similar 40-year option, as do VA loan borrowers, thanks to the VA’s recent update to its loan modification options. Some mortgage lenders offer a 40-year mortgage outside of modification situations. ( Carrington Mortgage, for instance, offers a 40-year loan.)
What is a 40 year mortgage?
A 40-year mortgage allows you to repay your loan over 40 years instead of the more common 30 or 15 years. This extended term comes with a lower monthly payment, but at the cost of a higher interest rate and more paid toward interest over the life of the loan. Forty-year mortgages are a type of non-qualified mortgage (non-QM loan), however.
Can you get a 40-year mortgage?
Yes, it’s possible to get a 40-year mortgage — but it’s not as simple as getting a more traditional 15- or 30-year loan. 40-year mortgages aren’t a common option for borrowers in good financial standing who are simply looking for a longer loan term on a new purchase. Instead, lenders typically use 40-year loans as a loan modification option.
How long does a 40 year home loan last?
Traditionally, mortgages come in loans anywhere between 8 – 30 years. In some cases, 40-year loans may have other features. For example, there might be interest-only periods for a certain timeframe at the beginning of the loan before switching to payments of principal and interest for the remainder of the term. How Does A 40-Year Home Loan Work?