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FHA Announces a 40-Year Loan Modification Option

A 40-year loan mandates a lot of interest payments and a slow build for equity, but FHA says it will prevent thousands of foreclosures, making that a fair tradeoff.

WASHINGTON – The Federal Housing Administration (FHA) introduced a 40-year loan modification option, and it’s asking the mortgage industry for input in a bid to expand its COVID-19 loss mitigation “waterfall.”

The proposed rule would revise repayment provisions for FHA borrowers and allow lenders to reframe a borrower’s total unpaid loan for an additional 120 months.

HUD says the goal is to prevent “several thousand borrowers a year from foreclosure.”

The change will give borrowers a more sustainable, lower monthly payment that can help bring a borrower’s mortgage current, prevent imminent re-default and help borrowers keep their homes. The rule specifically targets FHA borrowers who recently exited government-mandated forbearance but are having difficulty making mortgage payments due to COVID-19-related financial distress.

HUD said the rule would also lower losses to FHA’s Mutual Mortgage Insurance Fund as fewer properties would be sold at a loss in foreclosure or out of FHA’s real estate-owned inventory.

However, there’s also a downside to borrowers who opt for a 40-year loan modification. HUD says they’ll face slower equity accumulation and more interest payments. But it says the ability to keep their home should offset any drawbacks.

Source: HousingWire (04/04/22) Volkova, Maria

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