How to access loan features like Interest-Only payment mortgage
Accessing Loan Features like Interest-Only payment mortgage with Non-QM Loans
The Necessity of Non-QM Financing for interest-only payment mortgage
The primary reason borrowers must seek alternative financing to obtain Interest-Only payment mortgage is due to federal regulation established by the Consumer Financial Protection Bureau (CFPB).
Qualified Mortgage (QM) Restrictions: QM loans, which became the standard in 2014, were introduced to provide safer and more sustainable home loans for consumers. The Dodd-Frank Act requires lenders to determine a borrower’s ability to repay (ATR). Crucially, the act explicitly mandates that qualified mortgages cannot have risky loan features such as negative amortization, interest-only, balloon payments, terms beyond 30 years, or excessive points and fees.
Non-QM Allowance: A Non-Qualified Mortgage (Non-QM) is any home loan that does not comply with the QM rules. Since the IO payment feature is prohibited under QM rules, it is inherently classified as a Non-QM loan feature. Non-QM financing allows lenders to offer the IO option while still adhering to the Ability-to-Repay (ATR) rule requirements.
Non-QM Programs Offering Interest-Only Payment mortgages
IO payment features are available across multiple Non-QM product lines, catering to different borrower profiles (e.g., standard income, alt doc, or investors).
| Non-QM Program | Example IO Product Terms | Applicable Loan Term | IO Period | Amortization Period |
| Standard/Full Doc | 30 Yr Fixed IO | 360 months | 120 months (10 years) | 240 months (20 years) |
| Alternative Doc (e.g., Bank Statement) | 40 Yr Fixed IO | 480 months | 120 months (10 years) | 360 months (30 years) |
| DSCR (Investor Cash Flow) | 40 Yr Fixed IO | 480 months | 120 months (10 years) | 360 months (30 years) |
| Non-QM ARMs | 7/6 SOFR ARM IO | 360 or 480 months | 10 years | Remaining term |
| Elite Jumbo | 40 Yr Fixed IO | 480 months | 10 years | 30 years |
Non-QM products commonly feature a 10-year interest-only period. After this period, the loan converts to a fully amortized payment for the remaining term. Loan terms offering IO payments often extend beyond 30 years, such as the 40-year fixed IO loan.
Benefits of Interest-Only Payments (IO)
Borrowers, particularly investors and retirees, seek IO features for strategic financial management:
- Retirement Cash Flow Management: Interest-Only Non-QM loans can help retirees manage cash flow. Retirement introduces new financial complexities, and IO payments can be a tool to navigate these changes.
- Increased Liquidity: An IO payment structure results in a lower monthly housing expense during the IO period because the borrower is not paying down the principal. This keeps more capital liquid for investment or other uses.
- DSCR Qualification Advantage: For investment properties using the Debt Service Coverage Ratio (DSCR) loan program, the lender can calculate the DSCR based on the Interest-Only payment (ITIA – Interest, Taxes, Insurance, HOA). This often leads to a higher DSCR ratio compared to using the fully amortized payment (PITIA – Principal, Interest, Taxes, Insurance, HOA), making qualification easier for investors.
Qualification Requirements and Restrictions for IO Loans
While IO features provide flexibility, they are subject to strict underwriting standards within Non-QM programs:
1. Credit Score and LTV Restrictions
Interest-Only loans generally impose minimum credit scores and maximum Loan-to-Value (LTV) limits:
- Minimum FICO: A minimum 700 FICO score is frequently required for Interest-Only eligibility across various programs (Full Doc, Alt Doc, Asset Qualifier, and Investor Cash Flow). For some DSCR loans, a minimum score of 660 is permitted when the DSCR is 1.00 or greater, but a 700 score is needed if the DSCR is less than 1.00.
- Maximum LTV/CLTV: For Non-QM Edge Elite Purchase transactions, the maximum LTV/CLTV for an IO loan is 85%. For Rate & Term and Cash-Out refinances, the maximum LTV is 80%. DSCR loans allowing IO payments are typically capped at 75% LTV.
2. Qualifying Payment Calculation (Ability to Repay)
Although the borrower only pays interest during the IO period, the loan qualification is usually based on the higher, fully amortizing payment to ensure the borrower can afford the higher payment once the IO period ends.
- Non-DSCR Loans (Full Doc, Alt Doc, Asset Qualifier): The borrower must qualify using the fully amortized Principal & Interest (PITIA) payment calculated over the remaining amortization period (e.g., for a 30-year loan with a 10-year IO, the payment is calculated over a 20-year term).
- DSCR Loans (Investment Only): For Investor Cash Flow (DSCR) loans with an LTV of 75% or less, the DSCR calculation may use the interest-only payment (ITIA). If the LTV exceeds 75%, the DSCR must be calculated based on the fully amortized payment (PITIA).
3. Restrictions
- First-Time Homebuyers (FTHB): FTHBs are generally not eligible for Interest-Only features under many Non-QM programs.
- Texas Loans: Interest-Only is not eligible for Texas Home Equity Section 50(a)(6) loans.
- Ineligible Loan Types: Loans with Interest-Only features are generally not allowed for temporary buydowns, or for certain loan programs like the Horizon Elite AUS product.
- Reserves Calculation: For IO loans, reserves are calculated off the initial Interest-Only payment (ITIA) plus taxes, insurance, and HOA fees, instead of the full Principal & Interest payment (PITIA).
FAQ's
The Interest-Only payment (ITIA) may be used to calculate the DSCR for Investor Cash Flow (ICF) transactions only if the LTV does not exceed 75%.
No, Interest-Only is not eligible for First-Time Homebuyers across several Non-QM programs.
The maximum LTV/CLTV allowed for Interest-Only features on purchase transactions is often capped at 85% in certain Non-QM series.
A minimum 700 FICO score is often required to qualify for Interest-Only payment features under many Non-QM programs.
The loan cannot be qualified at the interest-only payment. The borrower must qualify based on a simulated fully amortizing principal and interest payment over the remaining amortization term.
Non-QM programs frequently offer a 40-year fixed term loan that includes an Interest-Only payment feature.
The standard Interest-Only payment period is 10 years (120 months). After this period, the loan typically converts to a fully amortized payment.
Interest-Only Non-QM loans can help retirees manage cash flow.
A borrower must use a Non-Qualified Mortgage (Non-QM), which does not comply with QM rules. Interest-only loans are an example of a Non-QM loan.
Traditional loans, or Qualified Mortgages (QM), cannot have risky loan features such as interest-only, balloon payments, or negative amortization, as mandated by the Dodd-Frank Act.
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