A proposed rule from the Department of Housing and Urban Development (HUD) would allow the Federal Housing Administration (FHA) to consider and utilize a 40-year mortgage modification. This would offer a 10-year extension on the current standard mortgage term.

This proposed increase from 360- to 480-months term is designed to allow borrowers to choose a lower monthly payment as the outstanding balance would be spread over a longer time frame. The declared goal is to allow FHA-insured mortgage borrowers to retain their home after default.

“The 40-year mortgage remains rare but has become more commonly recognized in the mortgage industry,” the FHA said. This new rule would put FHA in line with many other federally backed lenders, including Freddie Mac, Fannie Mae, National Credit Union Association, and the Department of Agriculture all which currently offer 40-year term loan modifications.

“By allowing 40-year loan modifications, HUD would align with the GSEs, NCUA, and USDA and ensure that FHA borrowers receive comparable opportunities for home retention,” the FHA added.

FHA also sees this as a way to offer those borrowers still utilizing COVID-related forbearance programs a path toward maintaining homeownership. In its filing, the administration said, “borrowers impacted by the COVID-19 pandemic, including those who may re-default in the future after having received a loss mitigation option under COVID-19 policies, may need a 40-year loan modification to obtain affordable monthly payments that would allow them to stay in their homes. This would also reduce losses to the MMI Fund as fewer properties would be sold at a loss in foreclosure or out of FHA's real estate-owned inventory.”

The FHA does not expect borrowers to use the full term of the modifications. It said in its filing, “FHA data indicates that the average life of a 30-year FHA-insured mortgage is approximately seven years, although it is possible that prepayment behavior could be different with a longer-term loan.”