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What is an Alt-A Mortgage?
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, the type of loan and lender fees. In short, a lender must demonstrate that the borrower can afford the monthly payment and pay back the loan in full over time. Additionally, interest only mortgages are not permitted according the Qualified Mortgage rules, so this is an example of an alt-a loan.
If a loan is classified as an alt-a mortgage this does not mean that the borrower cannot afford it, but it means that the lender applied more flexible guidelines to approve the borrower. For example, the lender may have permitted a lower credit score or higher debt-to-income ratio than usual. Or the lender may have approved the mortgage with less borrower documentation. These are just several of the many examples of loans and borrower situations that fall into the alt-a mortgage category.
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 regular 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 mortgage 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 loan and borrower characteristics that fall into the alt-a mortgage category include:
- 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 required waiting 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) or other unusual properties
- 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 rental property mortgages where the owner owns more than five properties
Use the FREEandCLEAR Lender Directory to search for twenty-five loan programs by lender type. For example, you can search for private money lenders that offer multiple alternative mortgage programs.
The important point for borrowers to understand about alt-a mortgages are that they may be a viable option when you cannot qualify for a mortgage using a traditional loan program. Additionally, because the mortgage rate and fees for alt-a mortgages are higher, we recommend that you shop several lenders to find the best loan terms.
Sources
"FHFA Limiting Fannie Mae and Freddie Mac Loan Purchases to Qualified Mortgages." News Release. Federal Housing Finance Agency, May 6 2013. Web.
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