Loan Modification

How Might the New 40-Year FHA Loan Modification Option Impact You?

The Federal Housing Administration has been working with American homeowners over the last two years to offset the economic impact of the COVID-19 pandemic. Given the fact that the coronavirus’s effect on the American economy has been so widespread – and the pandemic itself was declared a national emergency – numerous efforts have been made in this area. 

One of the most recent and most notable is a proposed change to the options offered to homeowners and buyers in terms of mortgages. With a longer-than-ever term announced as a new effort to keep people in their homes as part of these mitigation options, those looking for an FHA loan modification may soon have one more approach. 

The Introduction of the 40-Year FHA Loan Modification Option

In early April 2022, the FHA introduced a proposal that would add an additional 120 months to the maximum terms for mortgages. This would create a 40-year option for those looking to obtain an FHA loan modification as a result of the impact of the coronavirus. 

The immediate goal of this move is to reduce monthly payments, with the larger goal being to prevent more people from facing foreclosure. The Department of Housing and Urban Development is in favor of the move, offering the opinion that doing so will prevent thousands of families each year from losing their homes due to foreclosure. 

Additionally, the move would also benefit the FHA, itself. Since fewer homes would have to be sold at a loss due to foreclosure out of the FHA’s own inventory, the administration’s Mutual Mortgage Insurance Fund would take less of a financial hit than projected over the next decade. 

Adding to an Existing ‘Waterfall”

This move by the FHA is not unprecedented. It comes as the latest addition to what those in the agency and media surrounding its moves have called a “waterfall” of mitigation efforts. Given the deep and lasting impact of the pandemic on the American economy – and the millions of people who are still housing-insecure as a result – it is likely that the move will not be the last. 

Why Lengthen the Terms of a Mortgage?

Many financial advisors guide their clients toward shorter terms when it comes to mortgages. The sooner you can repay a loan, the better – at least in most cases. This is certainly true of conventional thinking when it comes to a home loan.

However, the last few years have brought some very exceptional circumstances into play for most people. The pandemic largely changed the look of employment and income for many families, and those impacts are still being felt. With that in mind, it is no wonder so many people have been forced to think outside the box when it comes to making ends meet and remaining in their homes. 

When the terms of mortgage repayment are lengthened, there is more time for the homeowner to repay that loan. In the case of the 40-year mortgage repayment plan, the payments are spread out across 480 months, as opposed to 360. Those additional years mean that the monthly payments are much lower, which is much more manageable for many American homeowners in the current economic landscape. 

What Happens if Things Change?

If this measure is approved and moves forward, thousands of homeowners are likely to seize the opportunity to lower monthly mortgage payments. Right now, this might be a necessity for many. 

But what happens if their economic situation changes?

As with most loans, mortgages can be paid off sooner than the actual terms. Choosing a mortgage agreement or FHA loan modification that allows you to repay the loan over a longer period does not mean you have to take that long to pay it down. Once finances improve for a family, they can always speed up repayment – but having the option to make minimum payments is a boon in the meantime. 

Not Without Negatives

It is important to note that adding an additional ten years to the terms of a mortgage will not be without some drawbacks for the homeowner. Learning more about these potential risks and how they weigh against the rewards of making this move can help families make informed decisions about their next moves. 

One major drawback is that with slower repayment, homes will accrue equity much more slowly than they would with a 30-year or shorter loan term. Another issue is that more interest payments will be present, adding up to a larger overall total that must be repaid. 

These are things that should be clearly stated before a person modifies their loan terms – and understood as part of the agreement. Before making this decision, be sure to go over all these terms and conditions with the financial institution you are working with. 

Generally, the reward of being able to remain in your home is worth the drawbacks that might come with the choice to extend your mortgage, but this may not be the case for you. This is why exploring all your options and understanding their impact is key to making the right choice for your needs.

Should You Modify? Let Us Help You Decide!

An FHA loan modification can be a good option for those who are looking for ways to remain in their homes and continue paying their mortgage payments despite changed circumstances. However, the process is not suitable for every person and financial situation. 

If you have concerns about keeping up with your mortgage payments and would like to explore your options, we can help you do that. The team at the Van Horn Law Group have ample knowledge and experience when it comes to the Florida state and federal housing laws. Our goal is to help you better understand your options – and guide you through the process of choosing the best one for you. 

Don’t continue living in the cycle of stress that the pandemic’s economic fallout has caused. Give us a call today and let us help you explore your next steps. 

Published by
Chad Van Horn

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