The Federal Housing Administration’s (FHA) new policy provides borrowers struggling with housing costs a potential reprieve by allowing modifications to extend mortgage periods up to 40 years (480 months). The increase in the term limit will result in lower monthly payments and give homeowners an affordable solution to housing costs.

Servicers will have a new tool for struggling borrowers. Once the borrower informs their servicer of difficulties in paying their monthly bill, the servicer then evaluates the homeowner’s situation for other alternatives. If a 30-year modification will meet the goal of a 25 percent payment reduction, there is no need for the 40-year option. However, if the 30-year modification is not available, lenders can now consider whether increasing the term will make the monthly payment viable. 

“Over the last year we have made substantive changes to our COVID-19 recovery options that are showing strong results in helping homeowners with FHA-insured mortgages recover from the devastating financial effects of the pandemic,” then-Principal Deputy Assistant Secretary for Housing and the Federal Housing Administration Lopa Kolluri said when the option was first proposed. “Adding a 40-year modification with partial claim to our toolkit for servicers today reaffirms our long-term commitment to continue helping as many struggling homeowners as we can to keep their homes.”

The 40-year modification also received support from interest groups promoting affordability solutions. Most recently, the Mortgage Bankers Association recommended a longer-term modification in its white paper on Regulation X reform and adjustments for the government-sponsored enterprises.

The National Association of Realtors (NAR) also supported FHA’s new policy.

“NAR believes that a standard for determining a borrower’s ability to repay must be flexible to accommodate borrowers with unique circumstances,” the organization wrote in its letter of support during the policy’s comment period. “Allowing the FHA to modify the mortgages of distressed homeowners to a monthly payment that they can meet with a moderately longer amortization helps to support homeownership and stability of the market. Furthermore, both Fannie Mae and Freddie Mac effectively use this tool to support homeowners during stress events demonstrating its merit.”