By Carol Ryan

Bargain mortgages originated by builders are helping more people get onto the property ladder. The hidden cost is inflated home values and underwater loans.

Big home builders are offering the cheapest mortgages in the market. America's largest builder, D.R. Horton, can give buyers a 3.99% rate on a 30-year loan, compared with 6.22% from a primary lender, based on Freddie Mac data. D.R. Horton's latest promotion in certain housing communities is a temporary rate buydown where buyers can get a 0.99% mortgage for the first year, rising to 3.99% by year four.

Large builders can offer these eye-catching deals because they buy forward commitments from lenders; an agreement to buy mortgages in bulk at a below-market rate. They then allocate low-cost loans to individual home buyers.

This ability to buy down mortgage rates makes large builders more competitive than other sellers. A regular home seller can offer sweeteners to encourage buyers to sign, but only up to a certain amount. A mortgage guaranteed by Fannie Mae, for example, allows seller concessions worth up to 9% of the purchase price. This might involve the seller offering to pay for decorating allowances or moving costs, or a sum of cash.

Big builders can give more generous incentives to buyers because forward commitments aren't counted as sellers' concessions under the underwriting rules. Lennar gave incentives equivalent to 14% of the average home price in its last quarter -- an effective price cut of $64,000 per property and the highest level of concession activity since 2010. Builders have a glut of unsold inventory and are leaning heavily on mortgage deals to tempt buyers.

But the cheap loans are probably inflating property values. Between 2019 and 2024, prices for new homes bought from large builders, who as a group are more likely to use buydowns, increased 6% more than both existing homes and new homes purchased from smaller builders who rely less on buydowns to drive sales, based on an analysis by the AEI Housing Center. Buyers overpay for their homes in return for a lower monthly mortgage payment.

The risk is that owners who paid an inflated price find themselves underwater soon after the sale closes. Newly built homes can be clustered in areas with plenty of new supply, which exacerbates the problem if values fall.

John Comiskey, founder of Reverse Engineering Finance, analyzed lenders with the largest percentage of underwater FHA mortgages that originated between 2022 and 2024. The top of the list is dominated by the lending arms of major builders.

Of the roughly 28,300 FHA loans that Lennar Mortgage originated over the two-year period that are tracked in Ginnie Mae's MBS database, 27% are now underwater, according to Comiskey. He also figures that of the 55,000 FHA mortgages issued by D.R. Horton's lending arm, 18% of borrowers owe more on their mortgage than their home is worth now. For comparison, Quicken Loans, which does a similar volume of Federal Housing Administration mortgages as D.R. Horton's mortgage arm but isn't owned by a builder, has a lower 10% rate of underwater loans.

Builders resist cutting home prices outright because it is cheaper for them to buy down mortgage rates. Say a builder has a house on the market for $400,000 that isn't selling. They can slash the price by 10% and take a $40,000 hit to their top line, or spend around half that amount to buy down the mortgage rate and help the borrower to qualify for a loan for the full $400,000 asking price. Avoiding deep price cuts is also important to protect the value of all homes in a newly built community.

But underwater mortgages increase risk in the housing market. Loose lending standards in the years leading up to the 2008 housing crash left many owners in negative equity when prices fell, creating more incentive for them to hand back the keys.

At the same time, the financial resilience of a subset of borrowers has been weakening as people stretch to afford a home. Last year, nearly two-thirds of FHA borrowers had a monthly mortgage repayment that consumed over 43% of their pretax income according to the agency, which is considered risky.

A 4% mortgage rate sounds like a good deal in today's environment. Outright price cuts would be healthier for buyers, and the housing market.

Write to Carol Ryan at carol.ryan@wsj.com

(END) Dow Jones Newswires

November 13, 2025 05:30 ET (10:30 GMT)

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