The Interest-Only loan grew popular between 2004 to 2008, when a host of brand new loan programs were introduced to the marketplace. These new loans were not considered conventional and they weren’t government-backed but designed primarily for those who could not otherwise qualify for a traditional mortgage for any variety of reasons. Such loans were introduced for buyers with poor credit, so-called “subprime” mortgages.
At first, subprime loans asked for a sizable down payment but that too went to the wayside. “Stated” or “No Documentation” loans made their way into the market as well as “payment option” loan programs where the borrowers could decide how much they wanted to pay each month. We all know what eventually happened. Those loans and the lenders who made them ultimately vanished from the lending landscape and lending guidelines took a complete 180.
Are Interest-Only Loans Gone for Good?
In 2011, the Consumer Financial Protection Bureau was created to help stabilize the credit industry from credit cards to home loans. The CFPB also coined the term “Qualified Mortgage” or QM and created specific guidelines on what a QM can be. If a lender approved a loan that fell into the QM category, the lender received certain legal protections. New QM requirements included capping the loan term at 30 years, no “balloon” payment loans or negative amortization (neg-am) loans were allowed to achieve QM status. The CFPB also eliminated “interest-only” loans, which had many scratching their heads to some degree. Finally, lenders were also required to verify the borrower has an Ability to Repay the mortgage which means both income and monthly debt fall within a certain range.
How it Works
Yet the interest-only loan has made a comeback as a portfolio product and is gaining popularity once again. Lenders will still verify income either with tax returns, bank statements or paycheck stubs and W2s but there are interest-only loans available today. An interest-only loan can be an ideal choice for someone that doesn’t get paid on a regular date such as on the 1st and 15th of every month but instead get paid intermittently such as someone who works on a commission or gets a quarterly bonus. An interest-only loan allows the borrower to pay only the interest due on the 1st of every month instead of the fully amortized payment. Because there are no prepayment penalties the borrower can make a payment toward the principal balance at any time.
Say someone gets a regular salary but also gets a quarterly performance bonus. While the borrower can certainly afford the mortgage payment based upon the regular salary with an interest-only loan there is a choice. In this instance, the borrower will make the minimum interest-only payment and then pay down the principal balance once the quarterly bonus is received.
Find Out if You Qualify
Interest-only loans aren’t as common as they used to be but there are lenders today who offer the program. And for the right client, it can be an excellent fit. Reach out to me if you need more info on this. I can help.