Did you know that 40-year mortgages are now a thing? Well, they are. Read on to learn more about this new offering.
Conventional loans have no government guarantees or insurance that the lender won't lose money on a mortgage transaction that results in a short sale or foreclosure. Purchasers who put down less than 20% of the sale price on conventional loans have to pay for Private Mortgage Insurance (PMI). This money will be used to reimburse (at least partially) lenders for loses.
Conventional loans can conform to Fannie Mae/Freddie Mac (pseudo government agencies that purchase mortgages) underwriting guidelines or not. Two of these guidelines that are relevant to this discussion are:
- Mortgage limit of $548,420 for 2021. This is the baseline which can be higher in high-cost areas.
- Maximum 30-year mortgage loan.
Conforming loans can be sold to Fannie/Freddie who package up the income streams and sell them as Mortgage Back Securities on the New York Stock Exchange. If the lenders lose money on the mortgages in the packet, the investor will lose money.
Non-conforming loans can't be sold to Fannie/Freddie and may therefore be less profitable for the lender who may have to hold onto the notes if they can't sell them. Consequently, they wouldn't be able to replenish their coffers through a sale, and this diminishes their ability to originate more loans. Interest rates will be higher on these loans to compensate for the possibility of lost income.
Some conventional lenders have begun to offer mortgage loans with a 40-year term. However, from what I've read, these are loans which are more than $900,000. Because these loans don't conform to the two bulleted points above, their interest rate will be higher than the rate on a 30-year loan. However, the borrower should still have lower monthly payments because they're spread out over 40 years. (If they weren't paying less monthly, there's no point in getting a 40-year mortgage because their lifetime payout will be more than with a 30-year loan due to 10 more years of interest.)
It now appears that government-backed loans (FHA, VA or USDA (sparsely populated, lower income)) may allow borrowers to start qualifying for 40-year mortgage loans in October, 2021. We'll have to wait and see if the underwriting guidelines for these loans will change. Will someone with a $250,000 mortgage be able to obtain one of these long-term mortgages? Will the interest rates be higher? FHA loan lenders are already 100% insured by the federal government so that they will not suffer loses. VA and USDA lenders are partially guaranteed by the government against losses. Presumably, these situations will remain the same for 40-year loans, and if that's the case, perhaps the interest rate for these loans will be similar to a 30-year loan.
In any case, these loans might be ideal for individuals who are seeking a loan modification in order to avoid a foreclosure. The lower monthly payment may be enough to keep struggling homeowners afloat and allow them to keep their homes.