The Federal Housing Administration (FHA) has announced that it is extending the maximum term for mortgage modifications to 40 years or 480 months, up from the previous limit of 30 years or 360 months.
The new regulation aims to help homeowners retain their homes after defaulting by allowing mortgagees to further reduce the borrower's monthly payment, since the outstanding balance would be spread over a longer time frame. Christine Stuart MAR 08, 2023
Upcoming FHA changes to loans for Americans:
The Federal Housing Administration (FHA) has increased the maximum term for mortgage modifications to 40 years or 480 months, up from the previous limit of 30 years or 360 months.
The new regulation will allow mortgagees to further reduce the borrower's monthly payment, helping homeowners retain their homes after defaulting.
The change will align FHA with modifications available to borrowers with mortgages backed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
The final rule, which adopts HUD's April 1, 2022, proposed rule without change, will take effect on May 8, 2023.
The new regulation aims to assist homeowners who have defaulted on their mortgages by allowing mortgagees to further reduce the borrower's monthly payment.
This will be achieved by spreading the outstanding balance over a longer time frame, thereby aligning FHA with modifications available to borrowers with mortgages backed by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac).
The new 40-year option is meant for those who “cannot achieve a minimum targeted 25 percent reduction in the Principal and Interest portion of their mortgage payment” using the current FHA 30-year mortgage modification option with a “partial claim”, according to a press release on the FHA and HUD official sites.
The final rule, which adopts HUD's April 1, 2022, proposed rule without change, will take effect on May 8, 2023.
The move is expected to provide additional tools for borrowers, improve the consumer experience, and lead to consistency and simplicity when addressing adverse market conditions, national emergencies, and natural disasters, according to the Mortgage Bankers Association (MBA) President and CEO Bob Broeksmit.
According to FHA, owners are not expected to use the full term of the modifications, as the average life of a 30-year FHA-insured mortgage is approximately seven years, although prepayment behavior could differ with a longer-term loan. While a borrower would pay over $114,000 more in interest on a 40-year mortgage on a $326,000 loan, monthly payments would drop from $1,687 to $1,504.
The change is intended to help more borrowers retain their homes after a default episode while mitigating losses to FHA's Mutual Mortgage Insurance (MMI) Fund. Additionally, it will enable mortgagees to provide more sustainable monthly payments to borrowers who are currently in some form of delinquency.
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