A 40-Year Mortgage Could Be in the Works. Here's What Borrowers Need to Know

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KEY POINTS

  • Many homeowners are struggling to make their mortgage payments in the wake of the pandemic.
  • A new 40-year loan modification program could help borrowers stay in their homes.


It could help a lot of homeowners manage their payments more easily.

When the COVID-19 outbreak first erupted, many homeowners lost their jobs and fell behind on their mortgage payments. Thankfully, the CARES Act, which was passed in March 2020, made it possible for homeowners to put their home loans into forbearance for up to 18 months. That allowed borrowers to pause those payments without being flagged as delinquent. 

But many homeowners are struggling to keep up with their mortgage payments now that forbearance is over. And those who can't pay risk losing their homes. 

Now, the Federal Housing Administration (FHA) is proposing one potential solution that could keep more cash-strapped borrowers in their homes. And if it takes effect, it could prevent a wave of foreclosure activity.

Extending home loan repayments

The FHA recently proposed an option to help borrowers shrink their monthly mortgage payments -- a 40-year loan modification. Loan modification involves changing the terms of a mortgage to make it more manageable. That itself is not a new concept, and it existed well before the pandemic.

But typically, the most borrowers could do was push out their payments over a new 30-year period. Now, the FHA is suggesting that borrowers be allowed to repay their mortgages over 40 years. Going this route could prevent several thousand foreclosures a year.

Preventing foreclosures is good for borrowers and lenders alike. For borrowers, it means staying in their homes and avoiding credit score damage. For lenders, it means getting repaid on the loans they give out rather than having to deal with the process of forcing the sale of homes in an effort to get repaid. In other words, everyone wins.

The downside of a 40-year mortgage

Allowing struggling borrowers to pay their mortgages over 40 years means prolonging that repayment period and creating a situation where homeowners incur more interest costs. It could also mean that it takes homeowners longer to build equity in their properties. 

Despite these drawbacks, the 40-year loan modification option stands to do more good than harm, the FHA argues. And it could be especially beneficial to borrowers who recently exited forbearance but are having a hard time making their monthly mortgage payments, whether due to inflation or due to having not yet recovered from the pandemic itself.

A recent report by the FHA revealed that as of December 2021, 7.28% of FHA loans were seriously delinquent. It's these borrowers who especially risk foreclosure. Allowing borrowers to modify their mortgages and repay them over a 40-year period could therefore serve as a lifeline to those who are seriously behind.

Now to be clear, what's being proposed right now is a 40-year mortgage modification option for borrowers who are struggling to keep up with their current mortgage terms. Most U.S. lenders do not offer a 40-year mortgage on new home purchases. But given the way home prices are soaring, that option could make sense. Lower monthly payments could make it possible for more people to buy homes at a time when property values are truly through the roof, so it'll be interesting to see if that option comes to the table.

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