Inflation, jobs data, and a packed holiday week — here’s what you need to know about mortgage rates and the housing market for the week of June 29, 2026.

Last Week in Review

Inflation stayed front and center last week. The headline PCE index rose 0.4% in May, pushing the annual rate to 4.1% — the highest we’ve seen since April 2023. Core PCE, which strips out food and energy, came in at 0.3% for the month and 3.4% year-over-year, still well above the Fed’s 2% target.

The Fed continues weighing inflation against employment as it looks toward future rate decisions. Geopolitical tensions and a resilient labor market have added to inflation worries, but oil prices have dropped considerably since May, which could help take some pressure off in upcoming reports.

On the housing side, new home sales fell 7.3% in May, landing at their second-lowest level in nearly four years — a clear sign that affordability is still weighing on buyers. We’re seeing that play out locally too: King County closed sales were down year-over-year in May, even as active inventory climbed about 17% compared to a year ago — so while fewer homes are selling, buyers here are getting a bit more breathing room and negotiating power than they’ve had in recent memory.

Meanwhile, the final read on Q1 GDP showed the economy grew at a 2.1% annualized pace, helped along by continued AI investment and stronger government spending.

Optimal Blue Rate Index

As of last Thursday, the Optimal Blue index has the average 30-year fixed rate at 6.411% — a slight improvement from what I shared with you last week.

Please note: this index reflects approximately 35% of mortgage transactions and is not a personal rate quote. You cannot lock in last week’s rate today, and factors like your credit score and loan-to-value will affect what you actually qualify for. This is intended to give you a sense of the trend, not a guarantee.

Economic Calendar This Week

It’s a short week — markets close early Thursday and reopen Monday for the Independence Day holiday. But it’s packed. Since it’s the first week of the month, we’ve got jobs data on deck: ADP on Wednesday and the BLS jobs report on Thursday. The market is expecting both to show around 110,000 jobs created, with unemployment holding steady at 4.3%.

Looking ahead, the next FOMC meeting is July 28–29, 2026.

That said, this week’s economic data will likely take a back seat to what’s happening with the war in Iran and its impact on oil prices.

Morning MBS Update

As of 9:10 a.m. Pacific time, mortgage-backed securities are flat.

In the Spotlight: Student Loan Payoffs & Cash-Out Refinances

With changes to federal student loan repayment programs taking effect July 1st, I want to make sure you’re aware of something important: if you’re paying off federal student loans through a conforming mortgage cash-out refinance, it’s not priced as a typical cash-out refi. Fannie Mae actually treats it as a rate-and-term refinance — which can make a real difference in your rate and costs.

Read the full breakdown here: Student Loan Payoff via Refinance.

If you have questions about your specific scenario — whether you’re buying, refinancing, or just trying to figure out your options — I’d love to hear from you.

There’s a less-talked-about Fannie Mae feature worth knowing about in this moment: if you use a refinance to pay off a student loan in full, Fannie Mae will waive the cash-out refinance fee (LLPA) that normally applies, and price the transaction more like a rate-and-term refinance instead. For homeowners sitting on meaningful equity, that can mean a noticeably better rate than a standard “pull cash out to pay off debt” refinance — and it sidesteps the new-repayment-plan guessing game entirely, because the loan is simply gone.

This post covers how that feature works today, what’s changing with repayment plans on July 1, and how to think through whether eliminating the loan now makes more sense than riding out the new system. For the back-and-forth on how student loans get counted in your DTI in the first place, see my guide on student loans and qualifying for a mortgage in Washington State — this post picks up from there.

What’s Changing With Student Loan Repayment on July 1, 2026

This round of changes comes from the Working Families Tax Cuts Act (also referred to as the One Big Beautiful Bill Act), and it’s a genuine overhaul — not a minor tweak. Here’s the short version:

• The SAVE plan ends. Roughly 7.5 million borrowers currently on SAVE (many in administrative forbearance with $0 payments showing) will get notices starting July 1 and have 90 days to choose a new plan. Anyone who doesn’t will be auto-enrolled in the Standard Plan or the new Tiered Standard Plan. (As of this writing, a last-minute lawsuit is seeking to delay this shutdown specifically — similar attempts haven’t succeeded so far, but it’s worth confirming the current status if you’re reading this after July 1.)
• Two new plans launch. The Repayment Assistance Plan (RAP) is the new income-driven option — payments run 1% to 10% of your adjusted gross income (your income before certain tax deductions), with a $10/month minimum and a $50/month reduction per dependent. Forgiveness, if any balance remains, happens after 30 years — longer than older income-driven plans. The Tiered Standard Plan replaces the old fixed plans with terms of 10, 15, 20, or 25 years based on total balance.
• A couple of older income-driven plans are being retired by mid-2028. If you’re already on one, you can stay for now, but you’ll eventually need to switch to something else. One other older plan sticks around longer, but only covers loans you took out before July 1, 2026.
• New loans disbursed on or after July 1, 2026 are limited to RAP or the Tiered Standard Plan only — and once you take out a new loan under the new rules, all your federal loans (even older ones) follow the new rules.

The bottom line for mortgage qualifying: if you’re currently on SAVE forbearance, or on one of the older income-driven plans, your monthly student loan payment is about to be reset to something different — possibly higher, possibly lower — and you don’t get to pick the timeline. That reset is exactly the kind of thing that can change your qualifying picture for a purchase or refinance without you doing anything at all.

How That Reset Hits Your Mortgage Qualifying

As I cover in more detail in my student loan DTI guide, Fannie Mae requires lenders to use the actual documented monthly payment from your credit report — and if that payment shows as $0 (which is common for SAVE borrowers in forbearance), the lender falls back to 1% of the outstanding balance.

That 1% fallback has been a known, stable number for SAVE borrowers with deferred or $0 payments. Once those borrowers are pushed into RAP or the Tiered Standard Plan, an actual payment will start showing up on the credit report — and a lender has to use that documented number instead of the 1% estimate. Depending on your income, dependents, and balance, RAP’s 1–10% of AGI formula could land above or below that old 1% fallback. There’s no way to know which way it goes for your specific situation without running the numbers.

If you’re planning to buy or refinance in the next year, this is worth getting ahead of rather than finding out about mid-transaction.

Fannie Mae’s Student Loan Cash-Out Refinance: Pay It Off, Skip the Cash-Out Pricing

This is where Fannie Mae’s student loan cash-out refinance feature comes in. Normally, when you refinance and pull cash out to pay off any kind of debt, Fannie Mae charges a fee based on your credit score and loan-to-value ratio — and that fee is usually the most expensive pricing hit a conventional loan can carry. Lenders typically build that cost into your rate rather than charging it as cash at closing, so you feel it as a higher interest rate for the life of the loan.

If the refinance is specifically structured to pay off a student loan and it meets Fannie Mae’s requirements, that fee is waived entirely — the loan gets priced the way a rate-and-term refinance would be priced instead. That’s a meaningfully different rate outcome than a standard debt-consolidation cash-out refi, particularly for borrowers with lower credit scores or higher loan-to-value ratios, where the standard cash-out fee tends to be steepest.

What You Actually Need to Qualify

Strip away the underwriting language, and here’s what this actually requires:

• The student loan has to be paid off completely — not paid down. If you have $40,000 left on the loan, the refinance needs to cover all $40,000, not a partial chunk of it.
• You have to be the one actually responsible for the loan. If you (or a co-borrower on the new mortgage) are personally obligated on the loan, it qualifies — even if someone else has been helping you make payments. A loan that belongs entirely to someone else, like one you co-signed for a child, doesn’t qualify.
• The payoff money goes straight to your loan servicer at closing — you don’t receive that portion as cash in hand.
• You still need to meet the same equity requirements as any cash-out refinance. What changes is the fee, not how much equity you need to leave in the home — generally around 20% or more, depending on your credit score.
• You can roll your existing mortgage into the same refinance, along with the student loan payoff — but generally not other debts like credit cards or a personal loan in this same transaction. (There are narrow exceptions, like a second mortgage that was used to help purchase the home.)
• You can get a small amount of cash back at closing — up to 1% of your new loan amount or $2,000, whichever is greater — but this isn’t a vehicle for pulling out a large lump sum.
• Closing costs and prepaid items can usually be rolled into the loan rather than paid out of pocket, and the same goes for property taxes if an escrow account is set up.

Source: Fannie Mae Selling Guide, B2-1.3-03, Student Loan Cash-Out Refinances.

As your NAF loan officer, I can confirm this isn’t an area where extra requirements get layered on top of Fannie Mae’s own guidelines — including the credit score minimums, which follow Fannie Mae’s standard thresholds rather than a higher in-house floor.

Is This a Fannie Mae-Only Thing?

Right now, yes — this particular fee waiver is specific to Fannie Mae. Freddie Mac has a similar-sounding exception, but it’s built for different situations (like buying out a co-owner after a divorce), not student loan payoff — so a Freddie Mac loan used to pay off a student loan is priced under standard cash-out rules today. FHA, VA, and USDA loans are priced differently in general and don’t have an equivalent fee to waive in the first place. [VERIFY: confirm this is still accurate at time of publishing, since GSE pricing programs do get revised.] If you have a choice of loan program for your refinance, which one your loan is sold to can matter here.

Is This the Right Move for You Right Now?

This tends to make the most sense if:

• You have enough equity in your home that paying off the loan in full still leaves you within the usual limits for a cash-out refinance — generally around 20% equity remaining, give or take, depending on your credit score.
• You (or a co-borrower) are personally obligated on the student loan, and you’d genuinely rather have it gone than manage it through a new repayment plan.
• You’re planning to buy or refinance soon and want a predictable DTI rather than one that depends on which repayment plan you land in after July 1.
• The math — new mortgage rate and payment, weighed against the student loan payment you’d otherwise be carrying — actually pencils out in your favor over the time horizon you care about.

It’s worth being honest about the other side, too: rolling a student loan into a 30-year mortgage means paying it off on a 30-year timeline instead of 10, 20, or 30 years on its own terms — and if you’d land on RAP with a low payment based on your income and dependents, riding out the new plan might genuinely cost you less over time than refinancing. This isn’t a decision to make on autopilot in either direction. I’d rather run your specific numbers both ways with you than tell you which way to go in a blog post.

What to Bring to the Conversation

• Current student loan servicer statement(s) or a payoff quote
• Whatever notice you’ve received (or expect) about your repayment plan options after July 1
• Recent pay stubs
• Your current mortgage statement
• A ballpark sense of your home’s value — you can pull one up anytime with Homebot

FAQ

Does this feature let me pay off more than one student loan?

Yes — you can pay off more than one student loan as long as each one is paid in full and at least one borrower on the mortgage is obligated on the loans being paid off.

What if my student loan currently shows a $0 payment because of SAVE forbearance?

A $0 reported payment doesn’t affect your eligibility for this refinance feature — the requirement is about paying the loan off in full, not about what your current payment shows. It does mean your current DTI calculation is using the 1% balance fallback, which is worth factoring into your decision either way.

Can I use this to pay off a private student loan?

Fannie Mae’s guidelines don’t distinguish between federal and private student loans for this feature — the requirement is that the loan is paid in full and at least one borrower is personally obligated on it.

Is there a minimum credit score for this program?

The same credit score and equity requirements that apply to any standard cash-out refinance still apply here — this feature waives the extra fee, not the underlying qualification requirements. I don’t add anything on top of Fannie Mae’s own standard credit score minimums for this program, so if you qualify for a standard cash-out refinance on the credit side, you qualify here too.

Read: Student Loans and Qualifying for a Mortgage in Washington State

Have student loans and trying to figure out the smartest move before the July 1 changes hit? I’ve been helping Washington State homeowners navigate exactly this kind of decision for over 25 years — let’s look at your specific numbers.

Let’s Talk  |  Get a Rate Quote

Rhonda Porter · Licensed Mortgage Advisor · NMLS #121324 · Washington State

The two things that determine your timeline are which chapter you filed and which loan program you use. Let’s break both down.

Chapter 7 vs. Chapter 13: Why It Matters

Chapter 7 is a liquidation bankruptcy — certain debts are discharged relatively quickly, typically within a few months of filing. Chapter 13 is a reorganization bankruptcy, where you commit to a court-supervised repayment plan that runs three to five years. That structural difference is exactly why Chapter 13 can sometimes get you to a mortgage faster than Chapter 7, even though it takes years longer to fully resolve — several loan programs will consider you while you’re still in an active Chapter 13 plan, as long as you’ve made your payments on time and the court signs off. (If you filed Chapter 11 instead, skip ahead — it’s a less common scenario covered separately below.)

Quick Answer: Wait Periods by Loan Type

Notice the pattern: FHA, VA, and USDA all treat Chapter 13 similarly — they don’t actually require you to wait for discharge at all, just a clean 12-month payment record and the court’s blessing. Conventional financing is the outlier here; Fannie Mae and Freddie Mac won’t consider you until your Chapter 13 case has been discharged or dismissed, full stop.

FHA

For Chapter 7, FHA requires 2 years from your discharge date — not your filing date, which is an easy point of confusion since discharge often comes months after you file.

For Chapter 13, FHA allows you to apply once you’ve made 12 months of on-time payments under your plan, with written permission from the bankruptcy court. This requires manual underwriting rather than automated approval, along with a written explanation of the bankruptcy. [VERIFY: confirm NAF’s actual practice on lending to borrowers still inside an active Chapter 13 plan — the agency allows it, but many lenders’ overlays effectively require waiting until discharge regardless, so it’s worth confirming before promising this timeline to a client.]

Read: FHA Mortgage Guide

Conventional (Fannie Mae / Freddie Mac)

Conventional financing has the longest waits of the four, and it’s the only one that won’t consider you while a Chapter 13 plan is still active — you have to wait until it’s discharged or dismissed.

For Chapter 7 or Chapter 11, the standard wait is 4 years from your discharge or dismissal date, reducible to 2 years with documented extenuating circumstances — the same non-recurring-hardship standard used for short sales. For Chapter 13, it’s 2 years from discharge, or 4 years from dismissal if you weren’t able to complete the plan. [VERIFY: confirm whether multiple bankruptcy filings within the past 7 years extend this further under current Fannie Mae guidelines.]

Read: Conventional Conforming Loans

VA

VA mirrors FHA pretty closely here. Chapter 7 requires 2 years from discharge. Chapter 13 allows you to apply after 12 months of on-time plan payments with court approval — again, before your case is even discharged. VA generally considers your credit “reestablished” after 2 years of clean credit following a bankruptcy. [VERIFY: confirm NAF’s overlay on in-plan Chapter 13 lending for VA, same caveat as FHA above.]

Read: VA Home Loan Guide

USDA

USDA requires 3 years from discharge for Chapter 7. For Chapter 13, it’s the same 12-months-of-on-time-payments-plus-court-approval structure as FHA and VA. As always, USDA also requires the property to be in an eligible area and within household income limits.

Read: USDA Home Loan Guide

What About Chapter 11?

Chapter 11 is rare for individual borrowers — it’s mostly used by self-employed business owners or higher-net-worth individuals whose debt levels exceed what Chapter 13 allows, or who need more flexibility than Chapter 13’s standard structure offers. If this applies to you, here’s where things stand by program:

Conventional financing groups Chapter 11 with Chapter 7: the same 4-year wait from discharge or dismissal applies, reducible to 2 years with documented extenuating circumstances — this part is well-established across Fannie Mae and Freddie Mac guidelines.

FHA, VA, and USDA are a different story. Their published guidance specifically addresses Chapter 7 and Chapter 13, but doesn’t separately codify a Chapter 11 rule. In practice, most lenders evaluate a Chapter 11 case individually, and it’s often treated similarly to Chapter 7 since it also results in a formal court discharge — but that’s lender judgment, not a published standard. [VERIFY: confirm NAF’s actual underwriting approach to individual Chapter 11 filings across FHA, VA, and USDA, since this isn’t standardized the way Chapter 7/13 are.]

If you’re in this situation, I’d treat it as a conversation rather than a lookup — the specifics of your case matter more here than they would with a standard Chapter 7 or 13 filing.

Non-QM Programs: Buying Sooner Than the Standard Wait Periods Allow

If none of the timelines above work for your situation, it’s worth knowing that Non-QM (non-qualified mortgage) and portfolio loan programs exist specifically for borrowers who don’t fit standard agency guidelines — including those with a very recent bankruptcy. These loans aren’t sold to Fannie Mae or Freddie Mac, and they’re not insured by FHA, VA, or USDA, so the lender sets its own rules rather than following agency seasoning requirements. “Non-QM” is a broad category, not one specific product — terms vary significantly from lender to lender.

The headline feature: some Non-QM programs will consider a borrower as soon as the day after a bankruptcy discharge, with no mandatory waiting period at all. The catch is that this comes at a real cost, not a loophole — the less time that’s passed since your bankruptcy, the more the lender will typically ask for in exchange:

• Down payments are often 25–30% or more right after discharge, generally easing as more time passes
• Rates run noticeably higher than agency loans
• You’ll typically still need a clean payment history for the most recent 12 months on any open accounts, even though the bankruptcy itself isn’t subject to a waiting period
• A written letter of explanation is standard, and the bankruptcy generally needs to be fully discharged or dismissed before you apply — if you’re still in an active Chapter 13 plan, most of these programs won’t consider you either

Whether this makes sense for you really comes down to the math: is paying a higher rate and a larger down payment now worth not waiting 2–4 years, given where home prices and rates might be by the time your standard wait period ends? That’s a conversation worth having directly rather than assuming either path is automatically right. [VERIFY: confirm NAF’s specific Non-QM/portfolio product lineup and current seasoning tiers/down payment requirements for recent bankruptcy before publishing, since this varies a lot by lender and I don’t want to advertise terms we don’t actually offer.]

Read: Non-QM Mortgages

What to Do During Your Wait

The same logic that applies to a short sale or foreclosure wait period applies here: the clock starts from your discharge or dismissal date, not your filing date, and the time before you’re eligible is exactly when you should be rebuilding credit and getting your documentation in order — not waiting passively for a calendar date.

Read: What Can You Do While You’re Waiting to Buy Again?

Read: Credit and Credit Scores Guide

If charge-offs or collections from before your bankruptcy are still showing up on your credit report, it’s worth understanding how those get evaluated separately from the bankruptcy itself.

Read: Charge-Offs Aren’t Forgiven Debt

Let’s Build Your Game Plan

If you’ve gone through a bankruptcy and you’re trying to figure out exactly when you’ll be eligible to buy again — and what to do between now and then — I’m happy to walk through your specific timeline with you. Schedule a free 30-minute discovery call and we’ll map out your path back to homeownership in Washington State.

If you’re waiting for “your number” to refinance, that uncertainty can feel like a reason to wait on everything. Don’t start the application. Don’t pull your credit. Don’t look too closely at your current loan. Just… wait.

Here’s the thing: waiting for the right rate and preparing to refinance are two completely different activities. You can — and should — be doing the second one while you wait on the first.

Let’s walk through what that prep actually looks like.

Why “Waiting” Shouldn’t Mean “Doing Nothing”

I’ve written before about why being ready matters more than rates dropping a full point — the best windows often don’t last long, and rates tend to climb faster than they fall. If you wait until your target rate shows up and then start your application, you may have already missed it.

But there’s a second reason to use this time well: some of what determines your new rate is in your control, and some of it isn’t. The market moving in your favor is out of your hands. Your credit profile, your debt load, and your current loan structure are not. Working on those now means that when the market does cooperate, you’re getting the best version of that rate available to you — not just a rate.

Why Mortgage Rates Move Like the Stock Market

Here’s something that surprises a lot of homeowners: mortgage rates aren’t set by a bank, and they aren’t the same thing as the Fed’s interest rate.

Mortgage rates are priced off mortgage-backed securities (MBS) — bundles of mortgages that get packaged together and traded on the bond market, the same way stocks trade on the stock market. And just like stocks, MBS prices move all day, every day, based on:

• Inflation reports
• Jobs data
• Fed meetings and commentary
• Treasury yields
• Even geopolitical news

Bonds and rates move in opposite directions: when MBS prices go up, mortgage rates tend to go down. When MBS prices drop, rates tend to rise. That relationship is why a single inflation print or jobs report can move rates more in one morning than weeks of normal drift — it’s the same kind of reaction you’d see in the stock market on earnings day.

It’s also why a Fed rate cut doesn’t automatically mean mortgage rates drop. The bond market often prices in what it expects the Fed to do before the Fed actually does it — so by the time the announcement happens, that move may already be reflected in rates.

This is the real reason rates feel unpredictable: they’re trading on a market, not sitting on a schedule. Nobody — not me, not the news, not a forecast — can tell you with certainty which day your target rate will show up. What we can do is make sure you’re fully prepared so that whenever it does, you’re ready to act.

Step 1: Determine Your Actual Target Rate

Not “lower than what I have now.” A specific number.

Your break-even point is what should set that number — not a round figure, and not the old “1% rule,” which doesn’t hold up the way it used to. Your target rate depends on:

• Your current rate and remaining loan balance
• Estimated closing costs for a new loan
• How long you plan to stay in the home
• Whether removing mortgage insurance or restructuring debt is part of the goal

Once we run those numbers together, you have a real target — the rate where refinancing clearly pays off for your situation, not a headline.

Step 2: Start Your Application Now — Even Before Rates Hit Your Target

This is the step most homeowners skip, and it’s the one that costs the most when rates finally move.

Starting your application early means:

• Your income, assets, and loan scenario are already reviewed
• We know exactly what your new payment and break-even point will look like at several rate levels
• When your target rate appears — even briefly — we can lock immediately instead of scrambling to pull documents

This is the whole idea behind Rate Watch: you tell me your target, we get your file ready, and I watch the market for you. No obligation to move forward — it just means you’re not starting from zero when the window opens.

Step 3: Review Your Current Mortgage

While you wait, take a real look at what you have:

• Loan type — FHA, conventional, VA? Some loans carry monthly mortgage insurance that refinancing can eliminate if your home has appreciated.
• Remaining term — Refinancing doesn’t have to mean restarting a 30-year clock. We can target a term that matches how long you’ve already been paying.
• Reserve/escrow account — If you have one, your current servicer refunds that balance a couple of weeks after a refinance closes — worth factoring into your overall cost picture.

Knowing these details now means there are no surprises when we model your new scenario.

Step 4: Review Your Debts

A refinance isn’t only about your mortgage rate — for many homeowners, it’s a chance to restructure debt at the same time.

While you wait for your target rate, it’s worth asking:

• Do I have higher-interest debt (credit cards, personal loans) that a cash-out refinance could pay off more efficiently?
• Would paying down a specific balance now improve my debt-to-income ratio enough to qualify for better pricing later?
• Am I about to take on new debt (car loan, furniture financing) that could work against me when we apply?

This is also a good moment to avoid big financial moves — new credit accounts, large purchases, or job changes — that could complicate qualifying right when your target rate shows up.

Step 5: Review — and Improve — Your Credit While You Wait

This is the step with the most upside, and the one people think about least.

Mortgage pricing is tiered by credit score. Moving from one tier to the next can improve your rate noticeably — sometimes by more than a modest market dip would. Unlike the market, this is something you can actually work on:

• Pay down revolving balances (credit cards) — utilization matters as much as payment history
• Don’t close old accounts while you’re preparing to refinance
• Correct any errors on your report before we pull credit
• Avoid new inquiries or new accounts in the months leading up to your application

We start with a soft credit pull, so checking this doesn’t cost you anything or affect your score.

Your Refinance Prep Checklist

• ☐  Calculate your break-even point and set a specific target rate
• ☐  Start your application so you’re ready to lock the moment your target appears
• ☐  Review your current loan type, term, and mortgage insurance
• ☐  Decide whether restructuring debt should be part of the refinance
• ☐  Pay down revolving balances and avoid new credit before applying
• ☐  Sign up for Rate Watch so someone’s watching the market for you

A Note for Washington State Homeowners

Home values across King, Pierce, and Snohomish counties have shifted meaningfully over the past few years — which means many homeowners who bought with mortgage insurance now have enough equity to remove it through a refinance, separate from whatever happens with rates. And since Washington has no state income tax, every dollar you free up in your monthly payment stays in your pocket.

FAQ

Do I need to wait for rates to drop before I start a refinance application?

No. Starting your application early means you’re fully reviewed and ready to lock the moment your target rate appears, instead of starting the process from scratch once rates move.

Will starting an application obligate me to refinance?

No. You can begin the process, review your numbers, and decide not to move forward at any point. There’s no obligation until you choose to lock a rate and proceed.

Does checking my credit before refinancing hurt my score?

We start with a soft credit pull, which does not affect your score. A full credit pull only happens once you decide to move forward.

What’s the difference between waiting for rates to drop and improving my credit?

Market rates are outside your control. Your credit profile, debt levels, and loan structure are not — improving them can get you a better rate at any point in the market cycle, not just when rates fall.

Why do mortgage rates change so much from day to day?

Mortgage rates are priced off mortgage-backed securities, which trade on the bond market and react to economic data, Fed commentary, and other news the same way stocks do. That’s why rates can move noticeably within a single day rather than on a fixed schedule.

Rhonda Porter · Licensed Mortgage Advisor · NMLS #121324 · Washington State

I started my mortgage career in April 2000, before subprime lending became the dominant story of the decade. I watched it grow, watched it go sideways, and watched it collapse. I get asked often enough — usually in the context of “is this happening again?” — that I wanted to put what I actually saw, and what replaced it, in one place.

What “Subprime” Actually Meant

Subprime wasn’t a single loan product. It was a category of borrower and, by extension, a category of loan terms priced for that borrower’s risk. A subprime loan was typically made to someone with:

• A credit score below the conventional threshold of the time (often under 620)
• Limited, inconsistent, or undocumented income
• A high debt-to-income ratio
• Little to no down payment

To compensate for that risk, subprime loans came with higher rates, and very often a prepayment penalty — a fee charged if the borrower paid off or refinanced the loan within the first two or three years. The idea, in theory, was reasonable: give someone with credit challenges a “bridge” loan, let them rebuild their credit during a fixed-rate period, then refinance into a conventional loan before the rate adjusted.

In practice, that bridge often led nowhere. Many subprime loans were structured as 2/28 or 3/27 adjustable-rate mortgages — fixed for two or three years, then adjusting, frequently alongside a prepayment penalty that was still in effect right when the rate was about to reset. Borrowers who hadn’t improved their credit in that window had no good options left.

How It Got Out of Hand

A few things compounded at once:

Stated income loans (“liar’s loans”). Borrowers could state their income without documenting it. These weren’t supposed to be used for people who were padding their numbers — they existed for legitimately self-employed borrowers whose tax returns didn’t reflect actual cash flow. But the safeguards eroded, and the program got a well-earned nickname.

100% financing and piggyback loans. 80/20 loan structures — an 80% first mortgage paired with a 20% second — let borrowers purchase with no money down at all. No equity cushion meant no margin for error if home values dipped even slightly.

Compensation that, at some shops, rewarded the wrong thing. Before 2011, loan originator compensation wasn’t standardized. Some originators could earn a yield spread premium (YSP) tied to the rate a borrower accepted — the higher the rate, the higher the payout — which created a real conflict of interest at companies that allowed it. Pay could also vary loan to loan with no real cap or consistency, which gave some originators room to charge more simply because they could, not because the file warranted it. I never operated that way; Mortgage Master was a strict, consumer-focused shop, and I don’t recall steering anyone into a rate or charging based on what I could get away with. But I know it happened elsewhere, and the Fed’s 2011 Loan Originator Compensation Rule was written to close that gap industry-wide — standardizing how originators are paid and removing rate-based or steering-based compensation as an option for anyone, regardless of where they worked.

Wall Street’s appetite for volume. Subprime loans were bundled and sold to investors as mortgage-backed securities. As long as the loans could be resold, the immediate underwriter had less incentive to scrutinize whether the borrower could actually repay over the life of the loan.

None of this was one villain. It was borrowers who wanted more home than they could afford, originators who didn’t say no, real estate agents and appraisers who went along with inflated values, and a secondary market that kept buying. I’ve said before that I don’t think there are inherently “bad” mortgages — there are bad applications of mortgages, paired with bad or absent advice. Subprime is the clearest example of that I’ve seen in 25 years of doing this.

Why Someone Ended Up in a Subprime Loan

It’s worth separating two very different paths into subprime financing, because they led to very different outcomes.

Circumstance. Life events that happen beyond someone’s control — illness, a job loss, a divorce — can knock credit and finances off track temporarily. These borrowers were often otherwise solid: stable income, a track record, just a setback that conventional underwriting couldn’t see past.

Habit. A longer pattern of financial behavior — bounced checks, collections, chronic late payments — that reflected an ongoing approach to money rather than a single setback.

I always thought of a subprime mortgage as “band-aid financing” — a 2 or 3 year fixed period meant to give someone time to fix whatever caused the credit or income issue in the first place, with a clear plan to refinance into a conventional loan before the prepayment penalty period ended and the rate adjusted. It wasn’t meant to be a permanent home. The borrowers who treated it that way — who used the fixed period to actually improve their situation rather than just waiting out the clock — tended to come out fine. The ones who didn’t change anything were the ones who got hurt when rates reset.

And to be clear about something I felt strongly about at the time: there was nothing shameful about having used a subprime loan correctly. I had clients who were almost embarrassed to be associated with that word once it started making headlines — even though they’d done exactly what they were supposed to do. A few examples, details changed for privacy:

• A self-employed single mom with one year in business but five years in the same line of work, and excellent credit. Conventional guidelines at the time required two full years of tax returns or business licensing. We used bank statements to document her real income, got her into a 30-year fixed loan, and she later sold that home and moved up into a conventional mortgage using the equity she’d built.
• A couple where one spouse had a clean credit history and the other had a rougher one. They qualified for one of the last zero-down subprime programs available, spent their two-year fixed period actively rebuilding credit and changing spending habits, and refinanced into a conventional loan the moment their prepayment penalty ended.
• A young family living with in-laws, tight on down payment funds but with decent income and credit that simply hadn’t been established yet. The subprime loan got them into their first home; by the time the rate was set to adjust, their credit and equity position had improved enough to refinance.

What all three had in common was an exit strategy from day one, and a mortgage professional helping them work toward it. That’s the version of subprime lending that gets erased from the popular narrative — understandably, since it’s not the version that caused a financial crisis. But it’s the version most of my own clients actually experienced.

What It Looked Like From the Inside

I didn’t originate the riskiest products — I never did an option ARM, and avoided stated income loans (I typically preferred “no income” verified options where clients didn’t potentially find themselves doing a “liars’ loan”). But I was originating mortgages throughout this entire period, and I watched plenty of colleagues across the industry get pulled into a “growth at any cost” culture. I heard from a loan officer once who’d left a high-volume subprime shop, describing being trained to push out file after file with little regard for whether the borrower would actually be fine three years later. That conversation has stuck with me for nearly two decades because it illustrated something important: a lot of people in this business weren’t malicious. They were undertrained, underregulated, and rewarded for the wrong behavior.

That’s also why I’ve been such a strong advocate for licensing standards that apply to everyone who originates mortgages, regardless of what kind of institution they work for. Back then, loan originators at banks and credit unions weren’t required to be licensed under the SAFE Act the way mortgage broker originators were — only registered. That gap matters to me and is actually what caused me to start this blog.

What Replaced Subprime Lending

The subprime market didn’t just shrink after 2008 — it was rebuilt from the ground up, with rules designed to close the specific gaps that caused the collapse.

The Ability-to-Repay rule. Since 2014, federal law has required lenders to verify a borrower’s ability to actually repay any mortgage — full documentation of income, assets, and debts, calculated debt-to-income ratios, no more loans built around an introductory rate that’s guaranteed to balloon. Lenders who meet a specific set of standards can make a “Qualified Mortgage,” which gives them a legal safe harbor for having complied with the rule. Loans that don’t meet those specific standards — Non-QM loans — still have to satisfy the same underlying Ability-to-Repay requirement; they just document it differently. Either way, the borrower’s ability to repay has to be verified. That’s the part that simply didn’t exist as a requirement during the subprime era.

Loan originator compensation rules. Originators can no longer be paid more for steering a borrower into a higher rate, and compensation is now standardized rather than negotiable on a file-by-file basis. My pay today has nothing to do with what rate or price you end up with, and it can’t vary loan to loan based on what I might be able to charge — which is exactly the point of the rule.

Non-QM lending — not subprime’s comeback, but its opposite. Non-QM sometimes gets called “the new subprime” often enough that it’s worth addressing directly, because the comparison doesn’t hold up. Here’s the actual difference:

The one thing the two categories share is that both serve borrowers who don’t fit a standard W-2/tax-return box. That’s where the resemblance ends. Subprime’s failure wasn’t “lending to higher-risk borrowers” — plenty of legitimate lending does that. Its failure was lending to those borrowers without verifying they could actually repay the loan, and compensating originators in a way that rewarded ignoring that question. Non-QM closes both of those gaps by design. Non-QM mortgages exist to serve self-employed borrowers, real estate investors, and retirees living off assets — but with full underwriting, full verification of ability to repay, and none of the toxic incentive structure that defined 2000s-era subprime. Bank statement loans and DSCR loans for investment property are good examples: alternative documentation, not absent documentation.

The Homebuyers Privacy Protection Act. More recently, Washington and other states have moved to ban “trigger leads” — the practice of credit bureaus selling a borrower’s information the moment a hard credit pull happens, flooding that person with competing solicitations. It’s a smaller piece of consumer protection, but it’s part of the same throughline: less predatory noise around one of the biggest financial decisions someone will make.

The Lesson That Still Holds Up

If there’s one thing the subprime era taught me, it’s this: the loan itself is rarely the problem. The problem is a loan that doesn’t match the borrower’s actual ability to repay it, paired with an originator who either doesn’t explain that clearly or is incentivized not to. Every regulatory change since has, in one way or another, been an attempt to close that gap.

But the other lesson — the one that has nothing to do with regulation — is the one my clients from that era taught me: a loan that isn’t a perfect fit today can still be the right loan, as long as you go in with a plan. Know why you need the program you’re using. Know what you’re working toward. Know your exit. That was true for a self-employed mom using bank statements in 2006, and it’s just as true for a self-employed borrower or real estate investor using a Non-QM or DSCR loan today — the difference now is that the loan underneath that plan is built to actually support it, instead of working against you.

If you’ve got questions about how today’s loan programs work — whether you’re a W-2 employee, self-employed, or an investor — I’m happy to walk through your specific scenario and tell you honestly what fits.

Let’s talk.

Rhonda Porter
Licensed Mortgage Advisor · NMLS #121324
Washington State