Volume Builders Are Behind the Boom in Underwater FHA Loans
We’re starting to see something interesting in the data across New Braunfels, San Marcos, and the greater Texas Hill Country. It is a trend that should concern both homebuyers and real estate agents throughout our region.
When I look at the latest numbers on underwater FHA loans—mortgages where the homeowner owes more than the home is currently worth—there’s a clear pattern emerging. The lenders tied to big national builders have the highest concentration of underwater FHA loans by far, and this trend is particularly visible in our rapid-growth communities.
Let me show you what I mean and how underwater FHA loans are hurting homebuyers right here in Central Texas.
Chart showing Texas FHA Lenders ranked by percentage of underwater mortgages.
The Data: Why Builder Lenders Create These Underwater FHA Loans
Take a look at some of the top lenders on that list. Lennar Mortgage has nearly 27.5% of their FHA loans underwater. KBHS Home Loans (tied to KB Home) sits at 26.6%. Velocio Mortgage, which works with several large builders active in Comal and Guadalupe Counties, is at 25.8%. DHI Mortgage Company (D.R. Horton’s lending arm)—a major player in our area—shows 18% underwater.
Compare that to lenders who primarily work with resale homes. Many of them are in the 10-13% range. While that is still not ideal, it is significantly better than the builder-affiliated lenders operating across the Hill Country.
This isn’t a coincidence. There’s a specific reason why builder loans are ending up underwater at such higher rates, and it comes down to how sales have been incentivized over the past few years.
How The “Rate Buy-Down” Trap Creates Underwater FHA Loans
Here’s what’s been happening throughout the I-35 corridor. Many builders have been advertising “discounted” rates to attract buyers to new developments. You’ve probably seen the ads: “Buy now and get a 4.5% interest rate!”
Sounds great, right? In a market where rates have climbed to 6% or 7% across Texas, getting something in the low 5s or high 4s seems like an incredible deal, especially for first-time homebuyers.
But here’s the math that matters, and it is math that most buyers don’t see until it’s too late (HINT: check your affordability before you buy)
FHA guidelines generally don’t allow borrowers to finance large discount points directly into their loan in a way that exceeds certain caps. However, builders can use seller concessions—up to 6% of the purchase price—to buy down the interest rate on your behalf.
The catch? That 6% is often already built into the sales price of that new construction home.
A Real-World Example: Say you’re looking at a new construction home near Creekside in New Braunfels that the builder lists at $350,000. To offer you that attractive 4.9% rate instead of the market rate of 6.5%, they need to buy down your rate using discount points. That might cost $15,000 or more.
Where does that $15,000 come from? It’s baked into the $350,000 price tag. The home might actually be worth $335,000 in the current market, but you’re paying the premium to get the lower rate.
When you close on the loan, you owe $350,000. If the market slows down, or home values level out in your neighborhood, you could quickly find yourself owing more than the home is worth.
Why Resale Homes Are Often the Safer Bet
Now let’s compare that to a resale home—an existing property sold by a homeowner, not a builder.
Resale homes in Comal and Guadalupe County are priced by the market, not by a marketing department. If a home in Gruene or near Texas State University is listed at $335,000, that price is based on comparable sales and what buyers are actually willing to pay.
You might still use seller concessions to help with closing costs or to buy down your rate slightly. But you’re not starting from an artificially inflated price point.
The Comparison:
Scenario 1: New Construction with Builder Incentive
- Purchase price: $350,000
- Builder rate buy-down: 4.9%
- Built-in concessions: $15,000 (Inflated price)
- True Market Value: $335,000
- Equity at closing: -$15,000 (Underwater immediately)
Scenario 2: Resale Home
- Purchase price: $335,000
- Market rate: 6.2%
- Seller concession: $5,000 (Negotiated, not inflated)
- True Market Value: $335,000
- Equity at closing: $0 (Or positive with negotiation)
In Scenario 2, your monthly payment might be slightly higher due to the interest rate. But you’re not starting out in a hole. Remember: You can always refinance a rate, but you cannot refinance a loan balance that is higher than your home’s value.
The Consequences for Homeowners
Being underwater on your mortgage isn’t just a number on a spreadsheet. It has real consequences.
If you need to sell your home because of a job relocation to San Antonio or Austin, a growing family, or financial hardship, you can’t—not without writing a check for the difference.
If you financed with a low down payment FHA loan (as many first-time buyers do), you have very little cushion to absorb any market correction.
Advice for Local Agents: Protecting Your Clients
If you’re a REALTOR® serving this area, use this data as a teaching tool. When a client is excited about a new subdivision because of a rate incentive, help them understand the full picture.
Pull up comparable sales. Show them what resale homes are selling for nearby. Run the numbers on both scenarios. Existing homes in established neighborhoods like Hunter’s Crossing often offer mature landscaping, better negotiation leverage, and prices set by reality rather than proformas.
The Bottom Line for Homebuyers
We’re seeing high concentrations of underwater FHA loans among builder-affiliated lenders because builders inflated prices to fund rate buy-downs. Now that the market has shifted, buyers are left holding the bag.
This isn’t about demonizing builders—they’re running a business. But as a mortgage professional who has served clients in New England and the Texas Hill Country, my job is to help you make informed decisions.
If you’re weighing new construction versus a resale home, let’s compare the real math side by side. The best loan isn’t always the one with the lowest rate. It’s the one that puts you in a home you can afford, with equity you can build on.