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Best Alternative Mortgage Programs

Best Alternative Mortgage Programs

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

    In an ideal scenario you qualify for a standard mortgage program from a traditional lender because these programs typically offer borrowers the best loan terms such as a lower mortgage rate and closing costs. Not all applicants, however, can qualify for a traditional mortgage and these programs may not be a good match for your personal or financial situation.

    There are a number of situations that may prevent you from qualifying for a standard mortgage. For example, you may have a ding on your credit report such as a bankruptcy, foreclosure or short sale. Some borrowers may not be able or want to provide documents such as tax returns, bank account statements and pay stubs required when you apply for a mortgage with a traditional lender. Or you may be self-employed, have significant fluctuations in your income or may not be able to verify your income or assets. Perhaps you have significant assets but minimal monthly income. These are all borrower situations that usually disqualify you from using traditional mortgage programs such as conventional, FHA, VA or USDA loans.

    Additionally, the circumstances that keep someone from qualifying for a standard mortgage may not be related to the borrower but rather other factors. For example, you may want to buy a home and flip it so you need a fix & flip loan, which traditional lenders do not provide. Or you may need a short term bridge loan to buy a home before yours sells. You may be trying to purchase a unique property that is challenging to finance. Some borrowers may want a second mortgage to enable them to buy a bigger home but may have difficulty qualifying.

    In short, there are a wide range or reasons related to borrowers, their mortgage requirements and the properties they are financing that can make it impossible to qualify for a traditional mortgage. These factors, however, do not mean that you cannot qualify for all mortgages.

    There are a wide range of alternative mortgage programs that are targeted at borrowers with unique or unconventional circumstances. If a traditional lender rejects your loan application, these programs may be the right financing option for you.

    The FREEandCLEAR Lender Directory enables you to search by lender type for twenty-five loan programs including several alternative mortgage options.

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  • As outlined in the table below, alternative mortgage programs are available for self-employed borrowers, borrowers who prefer not to provide financial documents and borrowers with challenging credit profiles. Depending on your situation and objectives, these programs may enable you to qualify for a mortgage even if you have been rejected by other lenders.

    The main difference between alternative and traditional mortgage programs is that alternative programs usually offer more flexible qualification requirements in one specific area. For example, you can qualify for a mortgage with a recent bankruptcy or you can qualify even if you cannot provide your tax returns. Some alternative mortgage programs allow a higher borrower debt-to-income ratio or higher loan amount.

    The flip side of this is that alternative mortgage programs typically apply stricter qualification requirements to other parts of your application. For example, you can qualify for a loan with a low credit score but you need to make a down payment of 30% - 40% as compared to a down payment of 20% or lower required for standard mortgage programs. So while qualification guidelines are flexible in one area they are usually stricter in other areas.

    The other significant difference between standard and alternative mortgages is that alternative programs usually charge a significantly higher mortgage rate and fees. Plus, non-traditional lenders have greater flexibility in pricing so you see a wider variation in rates and closing costs across different lenders. Just like with a traditional mortgage, borrowers should review proposals from at least four lenders to find the mortgage with the best terms.

  • Great Mortgage IdeaAlternative mortgage programs almost always charge a higher mortgage rate and closing costs than traditional mortgages so review your loan terms carefully
  • Additionally, these programs may impose additional charges such as prepayment penalties that you usually do not find with traditional mortgages. Borrowers need to ask if the higher costs and additional loan provisions are worth it.

    It is important to highlight that using an alternative mortgage program may be a temporary financing solutions.  For example, you may use a bridge loan or hard money loan to purchase a home but then refinance into a traditional mortgage with a lower rate and fees when your credit or financial profile improves.

    The table below summarizes alternative mortgage programs. Because you have a wide range of options, you should be sure to understand how each program works to find the one that best meets your needs. Click on the program title to learn more about each program including qualification requirements.

  • Alternative Mortgage Programs
  • 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 and subprime mortgages
    • Alt-a mortgages have more flexible qualification requirements than traditional mortgages
    Asset Depletion Mortgage
    • Asset depletion mortgages enable borrowers to use liquid assets to qualify for a mortgage
    • Asset depletion mortgages are good for borrowers with relatively minimal income but significant liquid assets
    • Applicants are not required to sell their assets to qualify for an asset depletion mortgage
    Bank Statement Mortgage
    • With a bank statement mortgage the borrower provides monthly bank statements instead of their tax returns, W-2s or pay stubs to verify their monthly income
    • Bank statement mortgages are usually used by self-employed borrowers
    • You may need to provide business bank statements in addition to your personal statements
    Bridge Loan
    • A bridge loan is a short term loan used to purchase a property
    • A bridge loan is typically refinanced or paid off when the property is sold, prior to the end of the loan term
    • Borrowers may use a bridge loan to buy a new home before their home sells or to purchase a fix & flip property
    Hard Money Mortgage
    • Also known as a private money lender, a hard money lender lends money to people who cannot get a mortgage from traditional lenders such as banks, mortgage banks, mortgage brokers or credit unions
    • Hard money lenders charge higher mortgage rates and fees than traditional lenders but may approve you when traditional lenders won't
    No Documentation Mortgage
    • With a no documentation mortgage, or no doc loan, borrowers are not required to submit any personal financial documents to verify their income, assets or employment
    • No documentation mortgages are typically used by self-employed borrowers or borrowers who primary source of income is from assets or investments
    • Borrower who are concerned about revealing their financial information may also use a no documentation mortgage
    Second Mortgage
    • A second mortgage, also known as a second trust deed, is a second mortgage on a property that uses the existing equity in the property as collateral for the loan
    • The second mortgage is subordinate, or junior, to the first mortgage on the property
    • You can use a second mortgage to buy a home or to take equity of your home without refinancing your existing mortgage
    Stated Income Mortgage
    • A stated income mortgage does not require borrowers to provide personal financial documents such as tax returns and pay stubs to verify their income
    • For some stated income mortgage programs, lenders pull your tax return information from the IRS
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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR. More about Harry

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