Lenders offer mortgages for borrowers with a wide range of financial circumstances. Between prime (highest-quality) and subprime (lowest-quality) home loans are a category called “Alt-A mortgages.”
The federal government sets guidelines for Qualified Mortgages that focus on a borrower’s ability to repay the loan. Alt-A mortgages generally don’t meet those criteria. They have more flexible guidelines that vary from lender to lender.
How Are Requirements Different for Alt-A Loans?
Lenders usually require borrowers to submit documents related to employment, income, assets and liabilities. With an Alt-A mortgage, a lender may require much less documentation. A borrower may not have to provide income tax returns, W-2s or employment verification. A lender may instead base its decision on information contained in bank statements.
Some people who take out Alt-A mortgages have low credit scores and can’t qualify for prime mortgages. In other cases, Alt-A borrowers have good credit but have other issues that can make it difficult to get a prime loan, such as a limited credit history.
Most mortgage lenders require a down payment. With Alt-A loans, borrowers may be able to put little or no money down. A lender may require a down payment for a borrower with a low credit score or lack of documented income, but may be more flexible on a down payment for a borrower with good credit and documented earnings.
Lenders have limits regarding debt-to-income ratio, or the percentage of a borrower’s monthly income that can go toward debt payments. With Alt-A mortgages, lenders may be more flexible with DTI ratios. That can allow borrowers to qualify for loans they otherwise couldn’t get or to borrow more than they would otherwise be able to.
After a bankruptcy, foreclosure or short sale, a prospective homebuyer may have to wait a period of time before taking out a new prime mortgage. An Alt-A loan may be available sooner.
Lenders often grant mortgages to borrowers who fall short or who are marginal in one area but who are well qualified in other ways. A loan may be classified as Alt-A if a borrower has multiple risk factors.
Is an Alt-A Mortgage Right for You?
A high loan-to-value ratio means that an Alt-A borrower will have little or no equity. That increases the risk to the lender since a homeowner who falls on hard times may decide to simply walk away. A high DTI ratio also makes an Alt-A loan risky for a lender since a borrower may be spread too thin and may be unable to keep up with mortgage payments.
Since Alt-A loans are riskier for lenders than prime loans, and since Alt-A loans are not as widely available, lenders typically charge higher interest rates. If you can’t qualify for a prime mortgage, an Alt-A home loan may be a good alternative. If you keep up with your monthly payments, you may be able to refinance later to get a lower interest rate.