40 Year Mortgage Modification: Everything You Need to Know

FHA 40-Year Loan Modification Announcement: What it means for borrowers and homebuyers

The U.S. Department of Housing and Urban Development (HUD), which oversees the Federal Housing Administration (FHA) announced their final rule regarding an increased 40-year mortgage modification term for borrowers beginning on May 8. The final rule allows mortgage lenders to offer a longer term to struggling borrowers after a default or delinquency in their monthly mortgage payment. This effort would also help homeowners avoid imminent foreclosure and forbearance on their existing mortgage loans.

This modification aligns FHA requirements with loan modifications offered by Freddie Mac and Fannie Mae lenders. 

When this program was first announced, there was a misunderstanding that this would be a new mortgage loan term option available for all homebuyers, but that information is incorrect.

The 40-year loan modification option is, in fact, not a new type of mortgage. Instead, it is a loan modification option to existing 30-year loans that are FHA-insured mortgages(so not new or first-time homebuyer FHA loan applicants). The modification will extend the repayment of the struggling homeowner’s existing loan period from 30 years to 40 years in an effort to help affordability.

FHA Programs for Financial Hardship

In recent years, the FHA has been introducing programs, including this new 40-year mortgage modification option along with other down payment assistance programs, to help make homeownership more accessible, particularly to those who face financial barriers to homebuying.

Many would-be homebuyers, especially first-time buyers, struggle to come up with enough money for a down payment, which can be a major hurdle to homeownership. By offering down payment assistance programs, the FHA aims to make it easier for these buyers to enter the housing market.

Why the FHA is offering a 40-year mortgage modification

In addition to down payment assistance, the FHA has also been working to bring relief to existing homeowners who have been impacted by the pandemic and are now struggling to make their monthly payments. The new 40-year mortgage modification is part of this effort, as it allows eligible borrowers to extend the repayment period of their existing FHA loan and therefore reduce their monthly mortgage payments.

This can help homeowners avoid foreclosure and remain in their homes during a difficult financial period. Overall, the FHA's various initiatives are aimed at promoting homeownership and supporting homeowners who may be facing financial challenges.The FHA decided to move forward with this loan modification offering after working on more loss mitigation options in recent years.

These efforts will allow these struggling borrowers to make their monthly mortgage payments more affordable. These lower monthly payments would come with an extended 10 year modification of the 30-year-mortgage home loan, making it a 40-year term.

The extended term will mean higher interest charges over the life of the loan, so borrowers would end up paying more in interest over time, but will be able to make their monthly payments without going into forbearance. It is also worth noting that lenders do not recommend the 40-year loan modification for homeowners who plan to move out of their current home or refinance their existing mortgage in the near future.

How do homeowners qualify for the 40-year loan modification?

The 40-year mortgage modification option is not a guaranteed solution for all borrowers, as not everyone will qualify for it. This modification was originally intended to help homeowners who were financially impacted by the pandemic and are now struggling as a direct result to meet their monthly mortgage payments. As a reminder, this will 

Borrowers must meet certain eligibility criteria for this new loan modification, such as being at risk of defaulting or in default on their current mortgage payments. It is important to note that those who choose this modification option will end up paying more in interest over the life of their loan and it really is best for those who imminently need to lower their monthly mortgage payment.

Eligible borrowers will also need to be able to demonstrate a clear financial hardship that is causing them to struggle with their mortgage payment. Homeowners with FHA-insured mortgages who are interested in this modification are encouraged to contact their mortgage servicer to discuss their options.

‍

If you have any questions or you’re ready to start your home search, Aalto is here to help. We’re dedicated to demystifying the real estate process and providing you with the tools you need to buy or sell your home. Get started on aalto.com.