FHA 40-year loans have recently emerged as an option for homeowners struggling with their mortgage payments. This longer loan term can provide much-needed payment relief, allowing borrowers to keep their homes instead of facing foreclosure. In this comprehensive guide we’ll explain what an FHA 40-year loan is, who qualifies and how it can help you.
What is an FHA 40-Year Loan?
An FHA 40-year loan is a mortgage modification program offered by the Federal Housing Administration (FHA). It allows financially struggling homeowners with FHA-insured mortgages to extend their loan term to 40 years.
Previously, FHA loan modifications were capped at 30 years. By adding 10 more years to the repayment period monthly payments are reduced making the mortgage more affordable.
This program is intended to help prevent foreclosures. Lower payments allow homeowners who can no longer afford their current mortgage payment to keep their homes.
Who Qualifies for an FHA 40-Year Loan?
To qualify for an FHA 40-year loan modification, you must:
- Have an FHA-insured mortgage
- Be in default – meaning you’ve missed at least one mortgage payment
- Demonstrate you can afford the modified monthly payment
There is no income limit or specific hardship requirement. The process is streamlined without much paperwork needed.
Your mortgage servicer will first evaluate if a 30-year modification adequately reduces your payment by at least 25%. If not, you may be eligible for a 40-year term.
How Does an FHA 40-Year Loan Work?
Here are the steps involved in getting an FHA 40-year mortgage:
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Contact your mortgage servicer. Setting up a meeting with your servicer is the first step. Explain that you’re having difficulty making payments.
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Get assessed. The servicer will assess your financial situation and determine if a loan modification could help. They’ll first analyze a 30-year term before exploring a 40-year option.
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Provide eligibility information. You only need to confirm you are struggling with payments and can manage the modified monthly amount. No income documentation is required.
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Get approved. If deemed eligible, your servicer will offer you a loan modification agreement with a 40-year term to reduce your payment.
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Sign agreement. Once approved, you’ll sign the modification agreement adjusting the mortgage terms – interest rate, length, balance, etc.
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Begin modified payments. After finalizing the agreement, you begin making the lower monthly payments on your modified 40-year FHA mortgage.
How Much Does an FHA 40-Year Loan Reduce Payments?
Adding 10 years to your mortgage term means you are spreading repayment over a longer period. This directly results in a lower monthly payment.
Exactly how much your payment decreases depends on factors like your loan amount, interest rate, and remaining loan term. In general, you can expect a 15-25% reduction in monthly payments with a 40-year modification.
For example, on a $250,000 mortgage at a 6% rate, switching from a 30 to 40-year term would drop monthly payments by about $260. Extending the repayment period by 10 years brings payments down from $1,498 to $1,235.
Are FHA 40-Year Loan Modifications a Good Idea?
FHA 40-year loans allow homeowners who can no longer afford their mortgage payments to avoid foreclosure and remain in their homes. For many, this is an excellent solution.
However, there are some downsides to keep in mind:
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You’ll pay more interest over the long run due to the extended loan term.
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You won’t build equity as quickly, since more payments go toward interest.
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Refinancing in the future may be more difficult with a modified mortgage.
Carefully consider both the benefits and drawbacks when determining if this is the right option for your situation.
Alternatives to an FHA 40-Year Loan
If a 40-year FHA loan modification doesn’t seem right for you, here are a few other options to make your mortgage more affordable:
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Refinancing – Taking out a new loan at a lower interest rate results in a smaller monthly payment.
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Forbearance – Your lender temporarily pauses or reduces mortgage payments for a set time.
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Repayment plan – Allows you to repay missed payments over time in addition to your regular monthly payments.
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Loan assumption – Transferring the mortgage to another borrower who takes over payments.
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Home equity loan – A second loan with funds that can pay down your primary mortgage balance.
Be sure to consult your lender about all alternatives to identify the most suitable solution for you.
The Bottom Line
FHA 40-year loan modifications offer struggling homeowners a powerful tool to avoid foreclosure and remain in their houses. The extended repayment term meaningfully reduces monthly payments.
This program provides flexible relief, without burdensome qualification requirements. If you’re battling with mortgage payments, talk to your lender to see if an FHA 40-year loan is your best option. With lowered payments, you can get back on solid financial ground.
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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.
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.
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FHA approved 40-year mortgage for homebuyers in May
FAQ
Does FHA have a 40-year mortgage?
Can a qualified mortgage be 40 years?
What is the longest term FHA loan?
Do banks do a 40-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.)
Does FHA have a 40-year loan modification?
The provisions of the final rule will expand FHA’s loss mitigation options to include a standalone 40-year loan modification. The 40-year loan modification can assist borrowers in avoiding foreclosure by spreading the outstanding mortgage balance over a longer period, thereby making their monthly payments more affordable.
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.
What is an FHA-approved 40-year mortgage?
An FHA-approved 40-year mortgage offers many attractive benefits. The primary goal of the 40-year mortgage is to make monthly payments more manageable for homeowners. By stretching the loan term, the monthly commitment decreases, providing breathing space for borrowers. Imagine you want to buy a house, and the cost is $200,000.
Should the FHA insure 40-year term mortgages from origination?
Commenters suggested that HUD approve an option for the FHA to insure 40-year term mortgages from origination. Commenters said that 40-year terms at origination could provide homebuyers with more affordable monthly payments and more flexibility to find a mortgage that fits their needs.