You Can Get Interest-Only Mortgages from Mortgage Brokers Again

July 21, 2015 2 Comments »
You Can Get Interest-Only Mortgages from Mortgage Brokers Again

Party like it’s 2006! Mortgage brokers are now able to peddle interest-only mortgages to qualified borrowers nationwide.

Oh wait, that last part about being qualified isn’t really reminiscent of 2006, but I’ll get to that in a moment.

This week, United Wholesale Mortgage announced a new offering, interest-only mortgages, those which happen to fall outside the ever-important Qualified Mortgage (QM) rule.

That means they’re pretty hard to come by these days, especially via a smaller bank that isn’t dealing in jumbo loans to wealthy clientele.

UWM also happens to be a wholesale mortgage lender, meaning they work with mortgage brokers who connect with homeowners.

Here We Go Again?

Both mortgage brokers and exotic loans types like interest-only mortgages were blamed for the most recent housing crisis, but this time things seem to be a little different, at least for now.

The lender, which claims to be “one of the nation’s largest and fastest-growing wholesale lenders,” has some pretty tough requirements attached to the loans.

For one, you need a minimum FICO score of 720, so there certainly won’t be any subprime interest-only stuff floating around.

And perhaps more significantly, you need to bring at least 20% for a down payment, as the max LTV is 80% on this new program.

That’s certainly important, given the fact that an interest-only loan only pays off interest, no principal. So if home prices are flat, or worse, fall, the borrower could wind up with little to no equity to serve as a buffer for the lender in the case of default.

The program also calls for a max DTI ratio of 42%, strangely one percentage point lower than the max DTI on QM loans.

So one might say it’s quite a bit different this time around, even if it’s still an interest-only mortgage.

Not Your Uncle’s Interest-Only Mortgage

During the lead up to the crisis, it was common to see IO loans with no money down that only required subprime credit scores. Obviously lending like that when home prices were peaking was a recipe for disaster.

Today, UWM sees the offering as a way for “savvy” homeowners “to save additional discretionary income.”

In other words, they can afford a fully amortizing mortgage, but they want to pay interest-only so they can put their money elsewhere.

There’s no problem with that, so long as the borrower is actually savvy and knows what they’re getting into. And also has a way to get out of it if things don’t pan out.

Brokers should get a competitive boost as well by gaining access to a wider product range to offer borrowers.

For the record, their IO product is just like the stuff that came before it – a 10-year IO period followed by a fully amortizing 20-year payback period.

That means monthly mortgage payments will jump once the initial 10 years are up, though if these borrowers are truly qualified, they should be able to handle it. Or simply refinance or sell before that time is up.

In any case, it’s definitely interesting to see lenders dipping their toes back into the interest-only pool, especially seeing that the Consumer Finance Protection Bureau refers to IO loans as “toxic.”

2 Comments

  1. Jim August 2, 2015 at 10:16 pm -

    Hello Colin:
    I am glad I came across your site today. I was just looking into interest only loans to determine if they might be beneficial on a net present value basis. As you say, if it is a savvy investor who is disciplined and has better opportunities for their cash flow than paying down a low rate loan, then yes, it seems overwhelming good.
    The question I have for you, however, is why are we seeing more of these loans? When I was talking to a mortgage lender from the Bay Area I was being told almost everyone is using interest only if they aren’t paying cash. In my CA town they are becoming more popular as prices continue to climb at a pretty fast clip. It is a sign of low affordability, or, as you so aptly point out, given the strong qualifications, is it just more borrowers becoming savvy?
    Thank you

  2. Colin Robertson August 3, 2015 at 9:03 am -

    Jim,

    I doubt very many buyers are going the interest-only route…maybe really affluent folks who want their money elsewhere, but not everyday citizens. Others may have been sold the idea of an IO loan even if they don’t fully understand it.

Leave A Response