Alt-A Mortgage Overview
- Borrowers with a low credit score (less than 620) or limited credit history
- Mortgages with debt-to-income ratios for borrowers of 50% - 55% as compared to the standard 43% ratio for most mortgages. A higher debt-to-income ratio allows the borrower to qualify for a larger mortgage amount
- Borrowers applying for a mortgage within the waiting period (also called the seasoning period) following a major credit issue such as a foreclosure, short sale or bankruptcy
- Mortgages on condominiums that are not approved by government agencies (also called non-warrantable condominiums)
- Stated income, reduced documentation and no documentation mortgages that enable borrowers to obtain loans with little or no personal financial documents. These programs are often used by self-employed borrowers or borrowers whose primary source of income is income from invested assets. Other examples include self-employed borrowers that submit bank statements instead of tax returns or company financials and borrowers that provide one year of tax returns instead of two.
- Mortgages for foreign nationals who may find it difficult to qualify for a mortgage through traditional programs
- Cash out mortgages for investment properties or investment property mortgages where the owner owns more than five properties
An alt-a mortgage is a term used in the lending industry to describe a category of mortgages that fall in between prime mortgages (the highest quality mortgages) and sub-prime mortgages (the lowest quality mortgages). It is difficult to define exactly what an alt-a mortgage is, but in short, most alt-a mortgages fail to meet the Qualified Mortgage guidelines outlined by the government. The Qualified Mortgage guidelines focus on the borrower’s ability to repay the mortgage and the type of mortgage.
From the borrower’s perspective, the interest rate for an alt-a mortgage is typically 2.75% - 4.75% higher than the rate for a non alt-a mortgage and the closing costs are usually higher. In many cases a borrower will obtain an alt-a mortgage as a short-to-medium term financing option and then refinance into a standard mortgage with a lower interest rate and fees. As you can see by the list below, there are a range of circumstances that result in borrowers obtaining alt-a mortgages. Some of the mortgage and borrower characteristics that fall into the alt-a mortgage category include: