There are 3 basic mortgage arenas. Prime (A-Paper), Alt-A and Sub Prime.
A-Paper clients have credit scores usually from 720-850. They can document their income for 2 years with W2s, tax returns and paychecks. They have ample reserves put away and usually do not have any derogatory credit (lates, collections, medical, etc. ) They have stable housing history over the last 2 years and can put money down. No bankruptcy, foreclosure, repo.
Alt-A borrowers have had some challenges. Their credit scores are usually between 640 and 720. Maybe they are not able to fully document their income with W2s, tax rtrns. Instead they can qualify with 12-24 months bank statements or need to state they make more money than they do to qualify for a loan and not prove it. In return they get a little higher rate. The lender needs to make a higher return on their investment due to their higher
Subprime borrowers have had alot of challenges. Their scores are usually between 500-640. They have had some derogatory credit. Their housing history may be flawed. In general, they need more creative financing. Such as alternative tradelines. For instance, a college student graduates and has nothing but deferred student loans. A subprime lender may look at their utility payment history, or his/her rental history as a tradeline even though they don't report on his/her credit. However, in return for granting them a mortgage with such a high risk, the borrower's rate is much higher that of an A-Paper borrower.
Ex:) A-Paper might get a 6.50% interest rate. Alt-A might get a 7.50% rate. Subprime would have gotten a 9.00% rate.
Rates have gone up for Subprime borrowers, while A-Paper borrowers are seeing rates go down. Hope that helps.
Source(s): Professional Experience. I am a Residential/Commercial Loan Originator as well as a Realtor.