Interest-Only Non-QM Loans Explained: Who They’re For and How They Work
Interest-only loans allow borrowers to pay only the interest portion of their mortgage for a set period — typically the first 10 years — before transitioning to a fully amortizing payment. On Non-QM programs, interest-only options are available to both investors and owner-occupants who meet specific requirements.
How Interest-Only Loans Work
During the interest-only period, your monthly payment covers only the interest on the outstanding balance — no principal is paid down. After the IO period ends (typically 10 years), the loan recasts and the remaining balance amortizes over the remaining term, usually 20 years on a 30-year loan. The payment increases at that point because you’re now paying both principal and interest on a shorter amortization schedule.
Who Can Get an Interest-Only Non-QM Loan?
Interest-only options are available on both income-based Non-QM programs and DSCR investor programs, subject to the following common requirements:
- Minimum credit score of 700 (standard requirement across most programs)
- Maximum LTV varies: 80–85% on DSCR ≥ 1.00; lower LTV at sub-1.00 DSCR
- Available on 30-year fixed and ARM products (5/6 and 7/6 SOFR ARMs on most programs)
- 40-year IO options also available on select investor programs (10-year IO + 30-year amortization)
Interest-Only for Investors (DSCR Programs)
IO loans are particularly powerful on DSCR investment programs because the lower monthly payment (no principal) improves the DSCR ratio. When a property barely misses the DSCR threshold on a fully amortizing payment, switching to interest-only can push it over the line. The DSCR is calculated using the ITIA payment (Interest, Taxes, Insurance, Association) rather than PITIA.
ARM Products Available
| Product | Fixed Period | Adjustment | IO Available? |
|---|---|---|---|
| 5/6 SOFR ARM | 5 years fixed | Every 6 months after | Yes (10-yr IO) |
| 7/6 SOFR ARM | 7 years fixed | Every 6 months after | Yes (10-yr IO) |
| 10/6 SOFR ARM | 10 years fixed | Every 6 months after | Yes (10-yr IO) |
| 30-Year Fixed IO | Fixed for life | N/A | Yes (10-yr IO) |
| 40-Year Fixed IO | Fixed for life | N/A | Yes (10-yr IO + 30-yr amort) |
Why Borrowers Choose Interest-Only
- Lower initial monthly payments — improves cash flow during the IO period
- Useful for investors who expect property appreciation and plan to sell or refinance before the IO period ends
- Allows high-income borrowers with variable income (commissions, bonuses) to manage cash flow
- DSCR improvement on investment property — lower payment increases the coverage ratio
Key Takeaways
- Interest-only Non-QM loans are available — typically with a 10-year IO period
- Minimum 700 FICO required on most programs
- Available on fixed and ARM products; 40-year IO available on select investor programs
- IO significantly improves DSCR on investment properties by lowering the qualifying payment
- After the IO period, the payment increases — plan accordingly
Serving borrowers throughout California — Orange County, Los Angeles County, Riverside County, San Bernardino County, San Diego County, and the greater Southern California region including Santa Ana, Irvine, Anaheim, Huntington Beach, Fullerton, Garden Grove, and surrounding communities.