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What is an Alt-A Mortgage?

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

      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.

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      Points: Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
       
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      P & I More Info
      Principal & Interest: A periodic payment, usually paid monthly, that includes the interest charges for the period plus an amount applied to the reduction of the principal balance.
      Mortgage Insurance More Info
      Mortgage Insurance: The monthly cost for a policy that protects the lender in case you’re unable to repay the full amount of the loan. It is typically required for loans that have a loan-to-value ratio between 80% to 100%.
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      Property Tax More Info
      Property Tax: (Also called "Real Estate Tax.") Property taxes are government assessments on real estate property. With mortgage financing, the local, county or state tax assessment on real estate property is considered part of the monthly housing obligation and typically collected and set aside by the lender ...
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      Homeowner Insurance: or also commonly called hazard insurance, is the type of property insurance that covers private homes. It is an insurance policy that combines various personal insurance protections, which can include losses occurring to one’s home, its contents, loss of its use, or loss of other personal possessions of the homeowner, as well as liability insurance for accidents that may happen at the home or at the hands of the homeowner within the policy territory.lender ...
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      Homeowner Association Fee More Info
      Homeowner Association fee: (HOA) fees are funds that are collected from homeowners in a condominium complex to obtain the income needed to pay (typically) for master insurance, exterior and interior (as appropriate) maintenance, landscaping, water, sewer, and garbage costs.
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      Points More Info
      Points Fees you are willing to pay in order to get a lower interest rate. The number of points refers to the percentage of the loan amount that you would pay. For example, "2 points" means a charge of 2% of the loan amount.
      Origination Fee More Info
      Origination Charge: A loan origination charge is a fee charged by the lender for evaluating, processing, and closing the loan.
      Credit Report Fee More Info
      Credit Report Fee: Fee charged to obtain an applicant’s credit history prepared by one or all of the three major credit bureaus. Used by lender to determine the borrower’s creditworthiness.
      Tax Service Fee More Info
      Tax Service Fee: A fee charged by the lender to cover the cost of retaining a tax service agency. These agencies monitor the property tax payments on the property and report the results to the lender.
      Processing Fee More Info
      Processing Fee: A processing fee is a charge by the lender for clerical items associated with the loan. Examples of processing include loan set up, organization of loan conditions for underwriting, and preparing required disclosures for the borrower.
      Underwriting Fee More Info
      Underwriting Fee: A fee charged by the lender to verify information on the loan application, authenticate the property’s value, and perform a risk analysis on the overall loan package.
      Wire Transfer Fee More Info
      Wire Transfer Fee: In most cases lenders wire funds to escrow companies to fund a loan. Commercial banks that perform this function will charge the lender so the fee is generally passed on to the borrower.
      (If Any)
      FHA Upfront Premium More Info
      FHA Upfront Premium: A fee paid in cash at the close of escrow or more commonly it is financed into the loan. These premiums are pooled together by the FHA and are used to insure the risk of borrower default on FHA loans. FHA upfront premiums are prorated over a five year period, meaning should the homeowner refinance or sell during the first five years of the loan, they are entitled to a partial refund of the FHA upfront premium paid at loan inception.
      (If any)
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      Other Fees More Info

      Other fees could be either additional Administrative Fees that a lender charges or it could be a Flat Fee to cover all lender charges such as: (Origination Fees, Points, Underwriting and Processing Fees, Credit Reports and Tax Service Fees)

      The flat fee does not include prepaid items and third party costs such as appraisal fees, recording fees, prepaid interest, property & transfer taxes, homeowners insurance, borrower’s attorney’s fees, private mortgage insurance premiums (if applicable), survey costs, title insurance and related services.

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      *Actual rates and other information may vary. Sponsored results shown only include participating lenders. The information you enter on this page will only be shared with lenders you choose to contact, either by calling the phone number or requesting a quote.
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      Data provided by Informa Research Services. Payments do not include amounts for taxes and insurance premiums. The actual payment obligation will be greater if taxes and insurance are included. Click here for more information on rates and product details.
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