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As of May 8, homeowners who are straining to pay their Federal Housing Administration (FHA) mortgages have another lifeline: the 40-year mortgage modification.
The FHA has instituted a new policy allowing financially strapped borrowers to have the term of their mortgage lengthened to 40 years, thereby reducing the monthly payments. The previous term limit for a loan modification was 30 years (360 months).
The U.S. Department of Housing and Urban Development (HUD), which oversees the FHA, said it was making this move to give lenders the additional flexibility they need to help borrowers stay in their homes. Ideally the program would reduce a homeowner’s mortgage payments by at least 25%.
But HUD acknowledges the effect is blunted as interest rates remain high.
“While rising interest rates may keep the 40-year loan modification from providing significant payment reduction, HUD believes that rising interest rates make the 40-year loan modification more critical in circumstances where the 30-year loan modification does not sufficiently decrease the monthly payment to an amount that the borrower could afford to retain their home,” HUD’s final ruling reads.
Foreclosure prevention measures like this one do more than help people stay in their homes. They can also reduce the damaging effect of a foreclosure on the values of nearby properties. According to a recent HUD analysis, property sales located within 300 feet of a foreclosed property are devalued by about 1% per foreclosure.
How the 40-Year Modification Works
This mortgage modification process involves several steps. Here’s what interested borrowers can do and expect.
Borrowers Must First Reach Out to Their Mortgage Servicer
If you’ve found you can no longer afford your mortgage payments, make an appointment to talk things over with your mortgage servicer. They can then evaluate your situation and find the solution that makes sense for you.
Don’t Bother Trying to Apply On Your Own
“A 40-year mortgage modification is not a program for which a borrower applies,” a HUD spokesperson said in an email. She explained that after the servicer evaluates the homeowner’s situation, they might conclude that “all other home retention options are insufficient to help the borrower obtain a sustainable monthly mortgage payment.”
Prove Your Eligibility
You might expect this stage to be labor-intensive, but it’s a simple process.
To be eligible for a modification, a borrower who has defaulted on at least one month’s mortgage payment must do two things:
- Tell the servicer they’re having difficulty making their monthly payment
- State that they can afford the monthly mortgage payment as modified
No documentation is required; the lender will handle the assessment and discuss your options with you.
They will first see if a 30-year modification will meet the goal of a 25% payment reduction; if not, they can move forward with the 40-year modification. Having the longer-term option simply gives lenders more flexibility in lowering payments.
What Happens If You’re Approved
If you’re approved for a modification, your balance will be adjusted. It will include any unpaid accrued interest, escrow advances, projected escrow shortages, legal fees and foreclosure costs. Any late fees and penalties you’ve accrued will be waived. Your lender may add a month to your total debt so you have time to start paying the modified mortgage payment.
High Interest Rates Chip Away at Power of 40-Year Loan Modification
Modifying your mortgage involves taking out a brand-new loan. The monthly payments, the term length and the interest rate will all be different. If your current mortgage interest rate is much lower than the rate on the new loan, you may not end up saving money.
Consider that average mortgage rates on a 30-year loan in May of 2020 were around 3.2%, and as of May 2023 they’re more than double that amount. For struggling homeowners who have a low rate on their loan, recasting their mortgage might not be the best financial option in today’s rate environment.
Related: Compare Current Mortgage Rates
Jennifer Beeston, senior vice president of mortgage lending at Guaranteed Rate Mortgage, says that the 40-year mortgage modification will have the most impact on larger loan amounts, potentially saving borrowers with big mortgages hundreds of dollars per month.
Here’s a side-by-side comparison of two modifications using the same 6.5% interest rate, but with different loan amounts.
Related: Monthly Mortgage Calculator
“I think over the next few years, we will see 40-year mortgages enter the market at a widespread level beyond just modifications, as they can increase monthly affordability,” Beeston says. “Housing prices versus wages in many parts of the country have hit a level where a 40-year term may become the only path to affording a home.”
How Covid-Era Programs Are Shaping Today’s Policies
This type of loan do-over isn’t new. FHA used 40-year loan modifications during Covid to help borrowers affected by the pandemic stay in their homes. And the program was successful.
Now policymakers want to make the government’s other efficient home-retention programs permanent too, says Brendan Kelleher, associate director of loan administration at the Mortgage Bankers Association.
“Many lessons were learned from the Covid-era [measures], which allowed more borrowers to stay in their homes,” he says. “With the high-interest rate environment and a potential rise in unemployment, I think the FHA wants to get ahead of defaults and have more foreclosure prevention programs in its toolkit.”
Included in those lessons, Kelleher says, is the importance of keeping the application for assistance as simple as possible. He says that by streamlining the applications and limiting the amount of paperwork and proof of hardship that borrowers must provide, these programs have been more successful in preventing foreclosure.
It’s a big improvement on the “document-intensive” Home Affordable Modification Program (HAMP) that emerged after the 2008 housing crisis, he says.
His colleague Justin Wiseman, vice president and managing regulatory counsel at the Mortgage Bankers Association, elaborates, noting that with HAMP, “homeowners had to jump through many hoops to get approved. If we remove some of the restrictions, including requiring people to prove a reason for financial hardship, we’ll see these loss mitigation programs work much better.”
Should You Modify Your Loan?
A home can feel like a burden when you struggle to pay the mortgage. But before you plant that “for sale” sign in the front yard, consider your next move carefully.
Advantages of Keeping Your Home
- Your monthly housing payments are fixed. For people with fixed-rate mortgages, your monthly payments are shielded from price fluctuations that affect the rental market. Over time, as rent rises, your housing costs get cheaper and cheaper in comparison.
- This is a tough housing market for buyers. The last few years of ultra-high home prices across the country have made buying a home almost impossible. So, if you already own a home, you’re miles ahead of many would-be buyers who have been defeated by this uncrackable housing market.
- You’re building equity. Mortgage payments go toward your own property, making yourself richer, versus paying a landlord and having nothing to show for all that rent money when you move out. For example, say you bought your house 15 years ago when the average sale price was $285,100, and interest rates were about 6% on a 30-year loan. Your monthly payment would be around $1,700 (not including taxes, down payment or insurance). That’s roughly the same cost as today’s national average rent for an apartment. The homeowner’s payment is equal to or less than the renter’s, but the homeowner has built up about $82,500 in equity, whereas the renter has nothing to show for their payments.
Even in downturns, homeowners who hang onto their homes longer typically end up on top.
But if you can’t keep up with property taxes, repairs, or other expenses, selling may be your only option.
If you’re behind on your mortgage, talk to your lender about loan programs available to you. The worst thing you can do is avoid your lender and let months lapse between mortgage payments. Think of your lender as a resource to help you find a solution to make your mortgage more affordable.
