Interest-only loans, once blamed for the subprime mortgage crisis, are gradually re-emerging. But the product has changed a bit, which may ease some industry fears about their comeback. As home values rise, borrowers and lenders' confidence in interest-only loans has grown again.
Banks are typically more stringent when qualifying borrowers for interest-only loans. Most lenders require borrowers to have strong credit profiles and generally put down large downpayments. Thus, lenders feel that the are fairly well protected. For example, at Everbank, a Jacksonville, Fla based lender, a borrower needs a minimum credit score of 740, a downpayment of at least 35%, and a debt-to-income ratio of 43% to qulify for their interest-only jumbo product (loans exceeding $417,000)
Tom: if lenders had exercised these precautions in the housing boom of the mid-2000's, the housing bust would likely not have occured. Let's just hope that lenders continue to exercise conservative judgment and guidelines.