The report highlighted that the structure of non-QM loans has shifted since 2020, with the share of interest-only loans dropping by nearly half, while the proportion of loans with DTI ratios over 43% increased by 12 percentage points. Meanwhile, riskier features such as negative amortization and balloon payments have been eliminated.
In terms of borrower quality, non-QM loans are now performing similarly to QM loans in many respects. For example, the average credit score for non-QM borrowers in 2024 was 776, compared to 781 for conventional QM loans, and 699 for government-backed loans. The loan-to-value (LTV) ratio was also comparable between non-QM and QM loans, both averaging 75%, while government loans had a higher LTV of 97%.
While non-QM borrowers often have higher DTI ratios, the report noted that these loans are still performing well, with delinquency rates significantly lower than those for government loans.
Higher rates, lower risk
To offset the higher risk of default associated with non-QM loans, lenders generally charge slightly higher interest rates.
In 2024, the average 30-year mortgage rate for non-QM loans was 6.7%, compared to 6.4% for QM loans. However, lenders are focusing on higher credit scores and lower LTV ratios to balance out the inherent risks associated with high DTI ratios, limited documentation, and interest-only features.