Borrowers who got home loans through government-backed programs are increasingly falling behind on their payments, a potentially worrying signal for how lower-income Americans are faring in today’s economy.
Delinquency rates on Federal Housing Administration and Veterans Affairs loans reached 11.03% and 4.7%, respectively, at the end of last year, according to the Mortgage Bankers Association, breaching pre-pandemic levels.
While FHA and VA loans don’t have income restrictions, they’re insured by the government and have looser down payment and credit score requirements than conventional mortgages, making them popular among borrowers with dinged credit or lower incomes.
Learn more: Types of FHA loans: Your options and how to choose a program
Conventional mortgage delinquencies are creeping up too, but much more slowly. At 2.62%, they remain below pre-pandemic levels and near historical lows. The divergence in that data likely reflects the extra economic pressures lower-income borrowers have faced in recent years, in particular high home prices, inflation, and the rapidly rising interest rates designed to address it.
“While the Fed is cutting rates, and that’s helped lift asset prices a little bit, those on the lower-income household side are not feeling any benefit,” said James Knightley, chief international economist at ING. “Their borrowing costs are not going down. If anything, they’ve been going up, and we still have sticky inflation that’s eating into spending power.”
January Consumer Price Index data showed prices up 3% from a year earlier, well above the Federal Reserve’s 2% goal. The Fed cut interest rates three times in late 2024 amid signs that inflation was easing and the job market was weakening, but is now on pause as inflation shows signs of persistence. Traders are now expecting a single rate cut this year.
Gradual rise in delinquencies on the way?
The reasons consumers fall behind on their mortgages vary. About a quarter of FHA borrowers who were seriously delinquent — meaning they were more than three months behind on their payments — cited loss of income, followed by 19% who blamed excessive debt.
Private mortgage lending to subprime borrowers all but dried up after the financial crisis, and FHA loans provide the closest proxy today. Even in the best economic times, delinquency rates on these loans are typically several times higher than on conventional loans.
“It is a very different borrower profile,” said Andy Walden, vice president of enterprise research strategy at ICE Mortgage Technology. “It was kind of expected that this would happen in this FHA section first because those are the borrowers that are typically impacted first when the broader economy changes. I think you’ll see a gradual rise in delinquencies outside of that.”
