The Basics of an Alt-A Mortgage

An Alt-A mortgage is a mortgage loan that's riskier than prime mortgages, but not quite as risky as sub-prime mortgages. Alt-A mortgages offer more lenient application requirements than conventional mortgages. Most notably, it does not require applicants to provide full documentation for their income or assets. As the result, the Alt-A mortgages are open to borrowers who can't qualify for most traditional mortgages. Alt-A mortgage loans were popular during the real estate boom, but they fell from favor because a large number of borrowers defaulted on their mortgages. Today, very few lenders are willing to issue Alt-A mortgages making them very hard to obtain.  

What is an Alt-A Mortgage

Alt-A mortgage loans are issued by a wide variety of lenders, and each lender has it's own Alt-A mortgage loan requirements. However, all of them share the following characteristics:

  • Documentation requirements--while the borrowers are required to provide documents that verify their income, they don't have to provide as many documents as is required with traditional mortgages. For example, in a traditional mortgage, the borrower is required to provide copies of pay stubs, W-2 forms and tax returns. In Alt-A mortgage, a copy of a tax return will often suffice.
  • Debt-to-income ratio--debt-to-income ratios the ratio between how much the borrower owns on any of his or her loans and how much income the borrower earns. The Alt-A mortgage lenders accept borrowers will larger debt-to-income ratios than what traditional mortgage lenders usually accept.
  • Credit history--the borrower doesn't need to have particularly good credit history in order to qualify for an Alt-A mortgage. The credit score requirements are lower, but the borrower will not qualify with a recent foreclosure or bankruptcy.
  • Loan-to-value ratio--loan-to-value ratio is the ration between the value of the property the borrower wants to buy and the value of the mortgage he or she would be able to get in order to buy that property. Alt-A mortgages' loan-to-value ratio tends to be greater then in traditional mortgage loans.

Alt-A Mortgage Terms

While the Alt-A mortgage has more relaxed application requirements, the lenders make up for it with the loan's terms. Because Alt-A mortgages tend to offer more money than traditional mortgages, the terms tend to be higher. The interest rates also tend to be higher then they are in traditional mortgage loans. As the result, the borrower faces bigger monthly payments.

This is a big problem because a borrower may not be able to handle the higher payment, especially if they have credit problems and debt obligations. The lenders try to downplay just how high the monthly payments actually are by offering low introductory rates. They allow the borrower to make smaller payments for a limited period of time. Once the introductory period of time is over, the regular interest rates will seem even higher, making it even more likely that the borrower won't be prepared to deal with them an default.

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