Mortgage delinquencies up among first-time homeowners

First-time homeowners in Texas are falling behind on their mortgages at increasing rates, largely due to rising home insurance costs.

That's according to data from the Federal Housing Administration, which insures mortgages issued by private lenders. Most borrowers who get FHA loans are first-time homebuyers and typically have lower credit and less money saved for a down payment.

That makes them more vulnerable to rising monthly costs, said Erin Dee, the chief operating officer of Interlinc Mortgage Services, a lender based in Houston.

Roughly 6% of FHA loans in Texas were seriously delinquent in April, meaning they were at least 90 days past due, up from 3.7% a year earlier.

Scott Norman, the CEO of the Texas Mortgage Bankers Association, called that rise "concerning."

Both Dee and Norman said the primary driver of increased delinquencies on FHA loans was the rising cost of home insurance.

Home insurance rates have increased on average 80% since 2020, according to the Texas Department of Insurance. In some areas of the state, premiums have doubled from one year to the next.

Those increased costs show up in borrowers' monthly escrow payments, which mortgage lenders collect to cover property taxes and home insurance. Typically, lenders estimate annual premiums and charge borrowers monthly to cover the cost.

But if insurance costs jump suddenly -- as they have since 2022 -- banks cover the difference initially and then pass the cost along to borrowers the following year, in addition to the increased premium. "It is almost like a double hit," Dee said.

Compounding the problem is that homeowners with low credit -- those most likely to get FHA loans -- already pay more for home insurance than people in similar homes with good credit.

A report last year from the Consumer Federation of America and the Climate and Community Institute found that Texans with low credit are paying almost $3,000 more for home insurance on average each year than those with high scores.

The report found that a homeowner with good credit living in a high-disaster risk area will pay less than a homeowner with poor credit living in a low-risk area.

To qualify for a FHA loan, a borrower only needs a 500 FICO score.

Judson Robinson, the president and CEO of the Houston Area Urban League, said many first-time homebuyers don't fully understand that even with a fixed-rate mortgage, their monthly payment could change.

"They just know that when they finally were able to get their home acquired, that it was the note plus your insurance and your taxes .... [but] knowing that a couple of these things are adjustable based upon economic conditions is foreign to a lot of folks."

Robinson said the nonprofit has seen a 20% increase in calls over the last year of people in some kind of housing distress.

High delinquency rates haven't yet translated into a spike in foreclosures, Norman said, although filings are up in almost every state, including Texas.

The FHA data isn't broken down geographically within the state.

Dee said she was most concerned about recent homebuyers -- those who closed in 2022 and 2023 -- who haven't earned enough equity to sell, particularly as values have stabilized or in some cases decreased since the peak of the pandemic.

Late payments on conventional mortgages have remained flat, with less than 1% of borrowers in serious delinquency.