What Is a 40-Year Mortgage?

Can You Get a 40-Year Mortgage?

It's possible to get approved for a 40-year mortgage if you know where to look. These loans are not considered qualified mortgages, which means they don't conform to certain standards, such as a maximum term of 30 years.

Mortgage loans with 40-year terms are typically only available from portfolio lenders, which are lenders that keep some or all of the loans they originate rather than selling them to mortgage investors. This may include banks, credit unions, online lenders and private lenders.

Because they're not widely available, they may not be a good option for the average homebuyer. There are other downsides to consider as well. Let's look at how they work.

How Does a 40-Year Mortgage Work?

On the surface, a 40-year mortgage may appear to be no different from a 15-year or 30-year mortgage other than the repayment term. In some cases, that may be true. But as a non-qualified mortgage, 40-year loans may come with other features that could affect you differently:

• Fixed or variable rate: You may be able to obtain a fixed-rate 40-year loan or an adjustable-rate 40-year loan that functions like a traditional mortgage. With a longer term, however, you can expect higher interest rates compared to a 30-year mortgage.
• Interest-only payments: In some cases, a 40-year mortgage could start out as an interest-only loan for up to 10 years, after which your balance will be amortized over a 30-year period, as it would from the start with a 30-year home loan.
• Balloon payment: You may be able to take advantage of lower monthly payments for much of the repayment term, but you'll need to make a large lump-sum payment at the middle or end of the loan to satisfy the payment agreement.
• Higher closing costs: With qualified mortgages, the federal government sets limits on how much lenders can charge for closing costs. That's not the case with non-qualified mortgages, which could mean a higher upfront expense.
• Negative amortization: With some non-qualified loans, the lender sets a minimum payment amount that may not even cover the interest that accrues each month. The result is that your balance will grow over time instead of shrinking, also known as negative amortization. Selling the property is usually the only way to pay off the loan.

In all cases, you can generally expect a lower monthly payment because the payments are spread out over a longer period of time. But with a longer repayment term, you can also expect a higher interest rate and a higher total cost.

30-Year vs. 40-Year Mortgages

Because the 40-year mortgage market is relatively small, there's no average rate we can use to properly compare a 40-year loan to a 30-year loan. However, the following example can give you a general sense of how the two options might differ for a $400,000 loan:

Pros and Cons of 40-Year Mortgages

While there are some advantages to a 40-year mortgage loan, the drawbacks are numerous. If you're considering a 40-year mortgage loan, here's what to think about before you apply.

Is a 40-Year Mortgage a Good Idea?

For most homebuyers, a 40-year mortgage loan is typically not the right fit. To determine if it's right for you, consider these factors:

• Budget: If your budget is tight, a 40-year loan can make for a more affordable monthly payment. This is especially true if you qualify for interest-only payments for a period of time.
• Cash savings: Non-qualified mortgage loans may come with higher closing costs. Evaluate your savings to determine if you can afford additional costs on top of your down payment.
• Time in the house: You'll pay more in interest over the life of your loan with a 40-year term. However, if you're only planning to stay in the home for a few years, the difference might not be significant. The longer you plan to stay, however, the costlier a longer term will be.
• Risk tolerance: Because non-qualified mortgages are riskier than traditional home loans, you may need to agree to certain features that you may not be comfortable with, such as a balloon payment or negative amortization. Slower building of equity may also increase your risk of being underwater on your loan or not recouping the costs of selling the home.

Take your time to carefully evaluate your financial situation and goals to determine whether a 40-year home loan is right for you.

How to Get a 40-Year Mortgage

The process for obtaining a 40-year mortgage is generally the same as a traditional mortgage loan. The primary differences are in the qualifications and availability. Here are some steps you can take to get approved:

1. Evaluate your creditworthiness: Because 40-year loans are riskier than shorter-term options, you may need a higher credit score and lower debt-to-income ratio (DTI) to qualify.
2. Shop around: You'll need to do a little extra research to find lenders that offer 40-year mortgage loans. As you do, pay special attention to the features they offer. It can help to get preapproved with a few lenders to get an idea of which one offers the best terms.
3. Submit an application: Once you've settled on a lender, you can submit a full application. You'll likely also need to provide certain documents to verify your identity, income, job status and other financial details.
4. Finalize the loan: As soon as you're under contract for a home, you can start to finalize the loan process. This will typically involve an appraisal, a home inspection and other due diligence required by your lender. Once everything is completed, the lender will finalize the loan and set a closing date, which is when you'll complete the paperwork to fund the loan.

Alternatives to a 40-Year Mortgage

If your primary goal is to cut your monthly mortgage payment, here are some potential options to consider:

• Pay mortgage points. Mortgage discount points allow you to essentially prepay interest as part of your closing costs in exchange for a lower interest rate. For a 0.25% reduction in your interest rate, you'll typically pay 1% of the loan amount. This may be worth it if you're planning on staying in the home for a long time.
• Make a larger down payment. The more money you put down, the less financing you'll need. As a result, you'll end up with a lower monthly payment. Plus, if you put down 20% or more on a conventional loan, you can avoid private mortgage insurance.
• Consider an adjustable-rate mortgage (ARM). ARM loans offer an initial period with a fixed interest rate, most commonly for five years, after which the loan switches to a variable interest rate. But that initial fixed rate is typically lower than the rate on a fixed-rate mortgage. If interest rates go down before your initial fixed period ends, you may be able to refinance to avoid a higher variable rate.
• Apply for a government-backed loan. Loans insured by the Federal Housing Administration (FHA), U.S. Department of Agriculture (USDA) and U.S. Department of Veterans Affairs (VA) may offer lower interest rates, low or no down payment requirements and, in the case of VA loans, no mortgage insurance.

Prepare Your Credit Before Applying for a Mortgage Loan

Whether or not you're thinking about pursuing a 40-year mortgage, it's crucial that your credit profile is in tip-top shape before applying for a home loan. Check your credit report and credit score to determine where you stand and take steps to address potential issues that could affect your approval odds.

As you prepare to apply for a mortgage loan, working to improve your credit can help you reduce your monthly housing costs and maximize your total savings.