The share of mortgages using alternative lending practices accounted for nearly 6 percent of all home loan originations in 2025, the highest share since the housing crash two decades ago, according to real estate data firm Inside Mortgage Finance. That number has more than doubled over the past three years.
The rise isn’t driven by desperation on the borrower side. It’s mostly driven by volume pressure on the lender side.
With transaction activity stuck, hobbled by the lock-in effect from millions of homeowners still tied to 2020 and 2021 rates well below 3 percent, mortgage lenders are opening the aperture on who qualifies.
The newest target market: 1099 earners and the expanding class of residential investors, who accounted for 30 percent of all single-family home purchases in 2025, according to data from Cotality.
A recent Wall Street Journal report flagged the rise in non-conforming loans and alternative lending as a growing share of a “risky, unconventional mortgage” market. Inman spoke with mortgage experts to unpack the trend and whether it warrants concern.
What ‘non-conforming’ actually means
A non-conforming loan is one that doesn’t meet the standards set by Fannie Mae and Freddie Mac, the government-sponsored entities that buy loans from lenders and move the liability off their balance sheets.
If a loan doesn’t meet Fannie or Freddie’s guidelines, the lender has to either hold it in its own portfolio — with the direct default risk — or sell it into the private market, which is less liquid and more volatile.
What disqualifies loans varies, but the current wave of non-conforming activity is largely about how income gets counted. For W-2 earners, income verification is clean: wages are documented, taxes are withheld and lenders can calculate a reliable net figure. For 1099 contractors, it’s messier.
“As a 1099, if you make $100,000, it’s a bit of a black box as to what’s actually left over at the end of the year,” Briggs Elwell, co-founder and CEO of RLTYco, told Inman. “Banks generally consider income to be what you get after taxes.”
The complication goes beyond simple math.
Elwell noted that many 1099 earners, real estate agents among them, don’t pay quarterly estimated taxes on schedule, file their returns on extension through October, and write off enough expenses that their taxable income looks significantly lower than their actual earnings. That creates a structural qualification gap that traditional underwriting can’t bridge.
For real estate agents like Jan Bruno, who spoke to The WSJ, the gap was stark. Her taxable income was less than half of her actual earnings, and a nonconforming loan enabled her to qualify for up to $1 million, which was more than she would have been eligible for under a traditional mortgage.
What offsets the risk — and what doesn’t
Lenders are offsetting the income uncertainty with tighter requirements elsewhere: higher down payments, stricter credit score thresholds and lower loan-to-value ratios.
Colin Robertson, founder of The Truth About Mortgage, notes that this layered risk management is what distinguishes the current non-conforming market from the pre-2008 crisis era, when lenders stacked risk upon risk without compensating factors.
“Importantly, the vast majority of loans today remain agency-backed and require full underwriting,” Robertson told Inman. “And non-conforming loans are often used only by investors, rather than spilling over to the everyday home buyer as they did 20 years ago.”
LoanDepot told The WSJ it had a 68 percent increase in non-conforming loan production from 2024 to 2025. The company says it’s careful to match borrowers with appropriate products.
But analysts are watching the product mix, not just the volume. The one that draws the most concern is the interest-only mortgage.
“Interest-only mortgages came back in a pretty significant way in 2020,” Elwell said. “It’s a great product if you buy a house and the market goes up. But if you put down 10 percent on an interest-only mortgage and the market drops 15 percent, not only do you not own any equity, you actually owe the bank more than the loan you took out.”
The math gets harder when rates reset. Most IO mortgages convert to fully amortizing after seven to 10 years and reset to a higher interest rate.
Elwell walked through a scenario in which a $5,000 monthly payment could jump to $12,000 upon conversion. With the bulk of IO mortgages originated in 2020 and 2021, those resets start hitting in 2027 and run through the early 2030s.
That wave won’t arrive all at once, and it’s unlikely to trigger a crash. But Elwell says it’ll move inventory.
“I think you’re going to see a lot of people who signed on to IO mortgages back then come up against their resets that will most likely free up some inventory and create some movement in the market,” he said.
Pressure to do more deals
Every story about loosening lending standards requires someone to say it’s not 2008. Multiple someones, in this case.
The evidence backs them up, mostly. Nonconforming loans — those outside Fannie Mae and Freddie Mac’s standard guidelines — made up 22 percent of the market at the height of the housing boom in 2007, according to Inside Mortgage Finance.
Today that broader category still accounts for roughly a fifth of originations, but the riskiest slice of it, loans using alternative income documentation and other nontraditional underwriting, stands at just 6 percent.
The government guarantee is still absent for these products, but the underwriting isn’t the same either. No-doc, stated-income, NINJA loans — the truly toxic products that defined the mid-2000s — are not what’s driving this cycle.
“I don’t think the WSJ article is suggesting another ’08, because that crisis had a lot more to it than just one pool of buyers,” Elwell said. “But banks, due to low volume, are looking at ways to help buyers qualify and handle higher interest rates.”
Cristian deRitis, deputy chief economist at Moody’s Analytics, was more measured in his assessment to The Wall Street Journal: “They’re riskier loans by nature. Those borrowers are more likely to pull back or default on their loans.”
Delinquency rates on non-QM loans originated in 2023 and later have already been climbing faster than on traditional mortgages, according to Court Lake, a senior director at Fitch Ratings.
The concern isn’t that any one lender is taking on too much. It’s that low volume creates institutional pressure to stretch.
“If you have a mortgage operation and you have fixed costs you have to cover, there’s going to certainly be some pressure to do more deals, or be more creative,” deRitis told The Journal.
Stuck sellers, creative lenders
As deRitis alluded to, non-conforming originations are rising because the traditional buyer pool has largely stopped moving.
Homeowners who locked in rates under 3 percent face a brutal cost-of-moving calculation. Elwell put it plainly: moving from a 2 percent mortgage to a 6.5 percent one on a modestly nicer house can mean paying 70 percent to 100 percent more per month.
That keeps a significant portion of potential sellers in place, suppresses inventory and maintains elevated prices despite declining transaction volume.
The non-conforming product push is, in part, an attempt to manufacture volume from a buyer pool that wasn’t previously reached: 1099 earners with real incomes that look bad on paper, and investors running cash-flow calculations based on rental yield rather than traditional income verification.
“Banks aren’t waking up and saying they want to figure out a way to help 1099s buy more houses,” Elwell said. “They’re just trying to do more loans.”
Elwell said that once rates normalize and turnover picks up — whenever that happens — the pressure to stretch underwriting standards should likely ease.
