A Tenth of Recent Home Buyers Are Underwater on Mortgage

Homes bought with small down payments in past year are most likely to be worth less than the debt on them

Home buyers greet a real estate agent outside of a house for sale.

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More than one in 10 homes bought in the past year are worth less than what owners owe on their mortgage after rising prices and higher interest rates drove people to borrow using Federal Housing Authority and Veterans Administration loans that need smaller down payments.

Key Takeaways

  • About 11% of recent homebuyers had properties worth less than the debt owed on them in February.
  • Many of the underwater loans required much lower down payments than conventional loans.
  • Figure is far lower for the market as a whole

About 11% of people who borrowed to buy homes last year owed more than the properties were worth as of February, a figure that has climbed since late 2021, according to a report from data firm Black Knight.

That's far higher than the 1.42% figure for the market as a whole. As home prices rise, borrowers are struggling to meet down payments. 

Most of the recent underwater mortgages “are FHA/VA loans that – requiring much lower down payments than conventional loans – typically rely on principal paydowns and price growth over time to improve their equity positions,” Black Knight Vice President of Enterprise Research Andy Walden said in an email to National Mortgage News.

The FHA and VA Veterans Affairs guaranteed or insured almost 75% of upside-down mortgages in 2022, the outlet reported. 

A recent poll from Insurify found that more than one of every four of respondents who purchased a home in the last 11 months have properties worth less than the loans on them.

The national delinquency rate rose 7 percentage points in February but is down 13% year-over-year. The number of borrowers who were 30 days delinquent rose 7.1% in February, according to Black Knight’s report. The number of Americans 30 days past due rose by 19,000 in February from January. 

Overall, delinquencies worsened in 36 states and the District of Columbia. March typically has the largest improvement in mortgage delinquency rates, but difficult financial and market conditions may hold that back, the report said. 

National home prices rose more slowly in 2022, although they inched up 0.2% in February, seasonally adjusted, the first increase in eight months, according to Walden. February brought price increases in 39 of the nation’s 50 largest U.S. markets. Just three months earlier, 48 of those 50 markets were experiencing price declines. 

“Data show that the purchase market increased when rates declined in the early part of the month and borrowers were quick to take advantage of limited inventory,” Walden said. “In many areas of the country, that dynamic – low inventory and a modest rise in demand – led to an uptick in home prices.”

Some western states actually had values drop throughout February, Insurify data found. 

Before February’s price gains, homeowner equity levels had also been falling, according to the Black Knight data. Nationwide, equity for mortgage holders is down 12% from its 2022 peak. The average mortgage holder had $178,000 in tappable equity, down from $210,000 in early 2022. 

Article Sources
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  1. Black Knight. "February Home Prices See First Monthly Rise After Seven Straight Declines as Sales Pick Up on Lower Rates While Inventory Shrinks Even Further."

  2. National Mortgage News. "More than 10% of recent homebuyer loans are slipping underwater."

  3. Insurify. "New Insurify Report Reveals Housing Market Trends."

  4. CNBC. "Home sales spike 14.5% in February as the median price drops for the first time in over a decade."

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