An alt-A mortgage lands somewhere in between a prime and subprime mortgage. Borrowers who have higher credit scores and have lower interest rates get prime mortgages. Subprime mortgages are offered to borrowers with lower credit scores and have higher interest rates. Alt-A mortgages fall in between in prime and subprime mortgages in terms of risk and interest rates.
What are the characteristics of an alt-A mortgage?
Alt-A mortgages are typically low-documentation or no-documentation loans. This means that the borrower doesn’t have to fully document their income, assets, and expenses. Instead of the documentation, alt-A loans are processed based on what the borrower states are their income, assets, and expenses. However, this makes it easier for the borrower to fraudulently state these figures.
These mortgages typically have a low down payment with a high corresponding loan-to-value (LTV) ratio. In fact, it’s possible that the LTV ratio could be 100%. In these cases, the borrower does not have to put any money down. Additionally, alt-A mortgages tend to have more flexibility on the debt-to-income ratio (DTI) then there is with other mortgage types.
These permissions allow borrowers to buy more of a house than they might be able to afford. Therefore, borrowers with an alt-A mortgage are at a greater risk of default than other borrowers. It is because of this that alt-A mortgages are more expensive.
Who are alt-A mortgages good for?
An alt-A mortgage can be a good option for borrowers who are unable to document all their assets or those who don’t have a consistent income. Small business owners may benefit from this type of mortgage. This is because they might have trouble documenting their source of funds for the down payment. Additionally, their net income figures might hurt their chances for another type of mortgage. Borrowers who are self-employed often write off as many expenses as possible. However, this tactic can hurt their chances of securing a loan. Alt-a provides an alternative to these situations, as the borrower does not need to document these numbers.