Higher mortgage rates erased June’s improvement in borrower demand during July, but the retreat in overall activity concealed a continued shift in where mortgage production is coming from.
Total rate-lock volume fell 11.4% from June as Optimal Blue’s benchmark 30-year conforming rate increased 26 basis points to 6.72%, according to the company’s July 2026 Market Advantage report released Tuesday. Purchase locks declined 11.6% month over month, while rate-and-term refinance volume dropped 17% and cash-out refinances fell 4.7%.
Despite the monthly slowdown, total lock volume remained 4.8% above July 2025. Purchase activity was 5.7% higher year over year and continued to represent more than 81% of all locks.
Conforming loans accounted for just 47.3% of July locks, down from 48.6% in June and 52.2% one year earlier. Nonconforming loans, which include jumbo and Non-QM products, increased to 20.8% of production, gaining nearly 4 percentage points over the past year.
Non-qualified mortgages alone surpassed 10% of total lock volume, up 1.4 percentage points from June and more than 2 points from July 2025.
That extends a trend NMP identified in June, when conforming loans remained below half of production for a third consecutive month. July’s results show that the shift continued even as higher rates reduced overall borrower activity.
Investor And Alternative-Income Loans Drive Non-QM
Investor and debt service coverage ratio loans accounted for 33.5% of July’s Non-QM production, up nearly 4.8 percentage points from a year earlier. Bank statement loans represented 30.6%, while other expanded-guideline products made up the remaining 35.9%.
The composition matters because it shows that Non-QM growth is not tied to a single borrower group. Real estate investors, self-employed borrowers, and consumers requiring other forms of income documentation are all contributing to the segment.
That breadth also introduces greater complexity for originators and lenders. Unlike agency lending, Non-QM qualification can vary considerably by investor, documentation type, property cash flow, and borrower profile.
Government lending also remained a substantial part of July production. FHA loans represented 18.9% of locks, while VA loans accounted for 12.3%. Adjustable-rate mortgages remained above 11% of total production, exceeding the roughly 10% range that characterized much of 2025.
Borrower Credit Has Not Deteriorated
The product shift does not appear to reflect a broad deterioration in borrower credit quality.
The average credit score across all July locks was 730, including 753 for conforming borrowers, 716 for VA borrowers, and 676 for FHA borrowers. The average purchase credit score was 735.
Purchase debt-to-income ratios also remained below year-earlier levels across the major product categories. The average DTI was 36.7% for conforming borrowers, 43.5% for FHA borrowers, and 43.1% for VA borrowers.
Instead, the data suggests that fewer current transactions fit neatly inside the traditional conforming box. Elevated home prices, affordability pressure, borrower income structures, and investor activity are creating demand for a broader product mix even among borrowers whose overall credit profiles remain stable.
First-time buyers accounted for 44% of conforming purchase locks, down 1 percentage point from June. Their share of FHA purchase locks increased to 70%, while the VA first-time buyer share rose to 45%.
More Locks Are Falling Out
July’s higher-rate environment affected not only borrower demand but also the likelihood that locked loans would close.
Purchase pull-through fell 2.4 percentage points to 78.9%, reversing part of June’s improvement. Refinance pull-through declined 1.2 points to 69.9%.
The average locked loan amount also slipped from nearly $399,000 in June to just over $395,000 in July.
For originators, weaker pull-through raises the cost of spending time on borrowers who lock but do not reach closing. That risk becomes especially important as lenders take on more Non-QM and other specialized files that may require additional documentation, manual review, or investor-specific underwriting.
Product Growth Meets Tighter Execution
The product shift is occurring as lenders face less room for error in the secondary market.
Optimal Blue reported that the average number of investors bidding when loans were sold declined from 14 to 13 in July, its lowest level since December 2025. Best-efforts-to-mandatory execution spreads also narrowed across conventional and government 30-year loans.
Meanwhile, 53% of loans were sold with servicing retained, unchanged from June but down from 60% in January.
Together, the figures point to a market in which lenders are relying more heavily on specialized production while also managing tighter execution, pipeline fallout, and servicing decisions. Growing outside the conforming channel may produce additional volume, but profitability will depend on pricing those loans correctly, matching them with the right investors, and getting more locked files to closing.
