What to know about “Alt-A” Loan Programs
For most people, buying a home is the largest investment they will ever make. Applying for a mortgage is the most time-consuming – and sometimes most difficult – part of the home buying process. Credit score, employment history, debt, and loan-to-value ratio can all affect what kinds of rates and loans are offered.
Types of mortgages
The three most common types of mortgages are prime, subprime, and Alt-A mortgages. Prime mortgages are offered to borrowers with good credit scores and minor debt; they are considered low risk and typically receive the lowest interest rates. Subprime mortgages are for borrowers with low credit scores who are considered high risk; the higher interest rates help banks compensate for the added risk when issuing these loans. Alt-A loans are somewhere in between prime and subprime both in terms of risks and interest rates.
Basics of Alt-A loans
Alt-A loans are known for being low-to-no documentation loans. Instead of providing extensive documentation, borrowers simply need to state their income, assets, and expenses. This can benefit those without consistent monthly income such as small business owners.
Another feature of Alt-A loans is that they have low down payment requirements and a corresponding higher loan-to-value ratio. While most prime mortgages have LTV ratios of 80%, the LTV of an Alt-A loan can be as high as 100%.
The debt-to-income ratio for Alt-A loans is usually higher than the standard. While most loans require a DTI of 36%, Alt-A loans can exceed 43%.
Who benefits from Alt-A loans?
Alt-A loans are good options for borrowers with good financial and credit history but lower income. Entrepreneurs, freelancers, and other seasonal workers may benefit from Alt-A loan terms due to their inability to document a consistent income; this type of loan can also benefit small business owners whose net income may be lowered by extensive tax deductions.
The bottom line
Alt-A loans are an excellent mortgage choice for those with good credit, but without a steady, documentable income. While they can be high-risk loans for lenders, Alt-A mortgages can help small business owners, entrepreneurs, and other self-employed workers buy their dream homes.
by Author, Feb. 01, 2019