40-Year Mortgage

When using the VA loan, most borrowers opt for a 30-year mortgage. However, recent changes in housing regulations have opened the possibility of 40-year mortgages – but not in all situations. As such, we’ll use this article to discuss 40-year mortgages and current VA guidelines.

Specifically, we’ll discuss the following:

• What is a 40-Year Mortgage?
• Can You Get a VA Loan with a 40-Year Mortgage?
• Ginnie Mae Changes and the 40-Year VA Loans
• Final Thoughts

What is a 40-Year Mortgage?

When buying a home, most people use 30-year mortgages. With this type of loan, you make a series of payments every month for 30 years, with a portion of each payment going to interest expense and a portion going to loan principal. As a result, you slowly pay down your outstanding loan balance with the monthly principal payments. After 30 years, you’ll have paid off the entire loan balance.

However, prospective homebuyers don’t need to use a 30-year mortgage. Alternatively, 10-, 15-, 20-, and 25-year mortgages exist. Assuming the interest rate and loan amount remain the same, shortening the loan term:

• Increases your monthly payment
• Reduces the total interest payments you make
• Allows you to pay off your loan more quickly (assuming regular payments)

On the other hand, a 40-year mortgage extends the life of your loan. By stretching out the repayment period, a 40-year mortgage:

• Decreases your monthly payment
• Increases the total interest payments you make
• Allows you to pay off your loan more slowly (assuming regular payments)

Simply put, compared to a 30-year mortgage, a 40-year mortgage lets you pay less every month. But, in return, you pay significantly more in total interest payments over the life of your loan.

An Example:

To demonstrate the effects of changing loan terms, we’ll use an example. Assume you want to secure a $250,000 mortgage at 3.5% and want to compare the differences between 15-, 30-, and 40-year mortgages. (NOTE: Typically, the longer the loan term, the higher the interest rate. But, for the sake of simplicity, we will use a single interest rate in this example).

• 15-year mortgage ($250,000, 3.5%)
  • Monthly payment: $1,787
  • Total interest paid: $71,697

• 30-year mortgage ($250,000, 3.5%)
  • Monthly payment: $1,123
  • Total interest paid: $154,140

• 40-year mortgage ($250,000, 3.5%)
  • Monthly payment: $968
  • Total interest paid: $214,868

As these numbers illustrate, a 40-year term can potentially lower your monthly payments. But, these monthly reductions can come at a huge cost in terms of total interest payments. In this basic example, a homeowner who held a mortgage for the entire term would pay ~$60,000 more in interest with a 40-year mortgage rather than a 30-year one.

How Can I Get a 40-Year Mortgage?

In 2013, the Consumer Financial Protection Bureau – a US government entity – prohibited the issuance of new 40-year mortgages. More precisely, the Bureau established a set of rules to help ensure new homeowners could afford their mortgage payments. Accordingly, mortgage lenders no longer recognize these loans as qualified mortgages, that is, ones that follow the Bureau’s rules.

Regardless, some lenders have continued offering these 40-year terms as nonqualified mortgages. In other words, these loans do not adhere to federal government regulations, meaning lenders cannot as easily sell 40-year loans to investors. This reality means lenders assume more risk with 40-year mortgages, which makes finding a lender willing to originate one challenging. But, these loan products do exist if you’re willing to look.

Can You Get a VA Loan with a 40-Year Mortgage?

No, you cannot currently get a VA loan with a 40-year mortgage term. According to guidance from the Department of Veterans Affairs, the maximum VA home loan term is 30 years and 32 days; however, the term may never be for more than the remaining economic life of the property as determined by the appraisal.

And, the VA had prohibited 40-year loans even before the aforementioned rule change by the Consumer Financial Protection Bureau. VA administrators have consistently adhered to the belief that longer loan terms increase the risk for both borrowers and lenders. As a result, VA loans have always had a maximum loan term of 30 years (and, technically, another 32 days).

Ginnie Mae Changes and the 40-Year VA Loans

But, new federal policies may change the VA’s position on 40-year mortgages.

Ginnie Mae stands for the Government National Mortgage Association, and it’s a government-owned corporation within the Department of Housing and Urban Development. Ginnie Mae has a goal of indirectly promoting homeownership among Americans. More precisely, when government-insured loans (e.g. FHA and VA loans) are rolled together and sold as an investment (i.e. securitized), Ginnie Mae guarantees the principal and interest payments on those investments. In other words, when a homeowner misses a mortgage payment, Ginnie Mae will step in and make sure the investor who indirectly purchased that mortgage still gets paid.

This Ginnie Mae model helps guarantee a steady flow of investor funds into the US mortgage loan market, ultimately keeping loan costs low for buyers. Though complicated, the important takeaway is: when Ginnie Mae changes its rules, these changes open the door for changes to the underlying mortgage products that make up the pooled investments it guarantees.

And, Ginnie Mae just announced a major rule change. Following recent leadership changes, Ginnie Mae introduced a new 40-year mortgage pool for its approved issuers (NOTE: issuers are the lenders or their affiliates who normally pool individual mortgages and create the mortgage-backed securities purchased by investors). In theory, because Ginnie Mae will accept 40-year mortgages into its investment pools, the underlying lenders (e.g. FHA and VA) will begin offering 40-year mortgages.

However, the Ginnie Mae rule change only allows for modified 40-year mortgages, that is, loans that have had their terms extended due to a borrower’s financial distress. For example, say you have a 30-year mortgage but are struggling to repay it. A mortgage lender may modify your original loan, extend its terms, and reduce the monthly payments to make sure you can continue repaying.

In a press release, a Ginnie Mae executive stated: “Because an extended term up to 40 years can be a powerful tool in reducing monthly payment obligations with the goal of home retention, we have begun work to make this security product available.” Put simply, Ginnie Mae thinks extending the terms on distressed loans will help A) reduce monthly payments, and B) keep homeowners in their homes.

Bottom line, this Ginnie Mae change will likely not lead to the origination of new mortgages with 40-year terms. But, it will potentially open the door to more existing government-backed loans being modified into 40-year mortgages.

How Will This Ginnie Mae Change Affect VA Loans

In the same Ginnie Mae press release, the executive also noted that: “The terms and extent of use of the new pool type would ultimately be determined by the Federal Housing Administration (FHA) and […] Department of Veterans Affairs (VA) […], whose programs are the basis for the loans in Ginnie Mae pools.” Translation: it’s up to the FHA and VA to determine how they’ll implement these changes related to loans modified into 40-year terms.

And, in response to these changes, VA spokesman Gary Kunich stated that “[the] VA is aware of the change that Ginnie Mae has instituted. Once the moratorium on foreclosure and evictions for VA-backed loans ends, VA will provide appropriate guidance.”

Final Thoughts

In other words, don’t expect the VA to begin offering new, 40-year VA loans anytime soon. But, depending on how the Department of Veterans Affairs adapts to Ginnie Mae changes, current VA borrowers may find themselves able to modify their loans into 40-year terms.

Maurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.