Written by: Internal Analysis & Opinion Writers
A sharp uptick in mortgage delinquencies among first-time homebuyers is raising red flags for the housing industry, particularly for borrowers using government-backed loans. These trends suggest that some of the most financially vulnerable homeowners are increasingly struggling to stay current on their payments, amplifying concerns about affordability, inflation, and broader market risk.
New data from the Mortgage Bankers Association (MBA) and Intercontinental Exchange (ICE) highlight a growing divide between conventional and government-backed loan performance. In the fourth quarter of 2024, seriously delinquent loans—those 90 days or more past due—rose substantially for loans insured by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). FHA delinquencies rose by 70 basis points compared to the previous year, while VA loans saw an increase of 57 basis points. Meanwhile, delinquencies on conventional loans ticked up by just 2 basis points during the same period.
These figures underscore the financial pressure facing borrowers in the FHA and VA segments, many of whom entered the market during the pandemic housing boom. Unlike conventional borrowers, these homeowners often have lower credit scores, smaller down payments, and tighter budgets—making them more susceptible to economic shocks.
Marina Walsh, vice president of industry analysis at MBA, noted the widening performance gap. “Conventional delinquencies remain near historical lows, but FHA and VA delinquencies are increasing at a faster pace,” she said. By the end of the fourth quarter, the spread between FHA and conventional serious delinquency rates had reached a staggering 841 basis points, a sign of mounting distress in one of the market’s most sensitive corners.
Several factors are driving the disparity. Inflation has continued to outpace wage growth, reducing household purchasing power. Personal savings rates, once elevated during the pandemic due to government stimulus and reduced spending, have fallen back to historical norms or lower. At the same time, many FHA and VA borrowers are feeling the pinch of rising costs tied to insurance premiums, property taxes, and utility bills—all of which have climbed in recent years.
Other headwinds include rising levels of consumer debt, higher monthly payments from pandemic-era mortgage forbearance exits, and the lingering financial effects of natural disasters, particularly in regions prone to hurricanes, wildfires, and floods. In many cases, borrowers in the government-backed space are juggling multiple financial obligations with little room to absorb unexpected costs or income disruptions.
Affordability remains a central issue. The average 30-year fixed mortgage rate recently reached 6.83%—more than double the rate available just a few years ago during the peak of the pandemic housing rush. For many new homeowners, this rate environment means they are paying hundreds of dollars more per month than they would have if they had purchased earlier, placing additional strain on their budgets.
Data from ICE confirms that these concerns are not just cyclical. FHA delinquencies now stand roughly 2.5 percentage points above their pre-pandemic average, suggesting a longer-term structural shift. While the national delinquency rate remains below pre-COVID levels—currently about 22 basis points lower—the steep rise in late payments among FHA and VA borrowers could signal early signs of broader stress across the mortgage market.
These developments are also contributing to a decline in homeownership among first-time buyers. According to the National Association of Realtors, first-time homebuyers accounted for just 24% of all home purchases between July 2023 and June 2024—the lowest level recorded since the association began tracking the metric. High home prices, limited inventory, and tighter lending standards are all contributing to this drop in participation.
This contraction in first-time buyer activity carries implications beyond individual households. These buyers are critical to the health of the housing ladder, often purchasing entry-level homes that free up inventory for move-up buyers. Without a steady flow of new homeowners, the entire housing ecosystem can experience stagnation, with lower transaction volume and fewer opportunities for sellers to relocate or upgrade.
The rise in delinquencies highlights the urgent need for targeted policy solutions. Housing advocates have called for expanded down payment assistance programs, more flexible loan modification options, and increased funding for financial literacy and homeownership counseling. Others argue for broader economic support measures, such as student loan relief or tax credits, that could ease the overall debt burden on younger households.
At the same time, regulators and lenders are being urged to monitor risk exposure closely. If delinquency trends continue upward, especially in FHA and VA portfolios, there may be calls for tighter underwriting standards or enhanced servicing protocols to ensure loans remain sustainable. Early intervention—through borrower outreach, hardship programs, or temporary forbearance—may be key in preventing a wave of foreclosures.
Despite the current challenges, many in the industry remain cautiously optimistic. The job market remains relatively stable, and home equity levels remain high in most regions, which may provide some cushion against further deterioration. However, should economic conditions weaken, the cracks in the foundation are likely to widen—especially for those buyers who entered the market during its most overheated phase.
Ultimately, the spike in mortgage delinquencies among FHA and VA borrowers serves as a sobering reminder that homeownership remains deeply intertwined with broader financial health. For many Americans, particularly first-time buyers, achieving and maintaining the dream of homeownership is becoming increasingly difficult. Addressing that challenge will require coordinated efforts from lenders, policymakers, and the broader real estate community.
