What is an Alt-A mortgage loan?
Alternative A-paper, or Alt-A, is a type of mortgage loan classification. An Alt-A mortgage, also known as an A-minus mortgage, is between a prime mortgage and a subprime mortgage.
A borrower with a clean credit history may be given an Alt-A mortgage if their loan-to-value ratio or loan documentation are lacking in some way.
Factors that determine an Alt-A mortgage
Alt-A standards vary between bankers and lenders, but there are four general rules that will determine Alt-A qualification:
- Documentation: The most common characteristic of an Alt-A loan is a lack of documentation verifying a borrower’s income, assets, or employment.
- Credit score: Alt-A mortgage loan borrowers have clean, but not perfect, credit histories. Their credit scores are usually above 620, which is the point when a borrower’s credit becomes subprime.
- Debt-to-income ratio: Lenders allow for higher debt-to-income ratios in Alt-A mortgage loans.
- Loan-to-value: Alt-A loans are often characterized with low down payments.
Though an Alt-A mortgage loan poses more of a risk to the lender than a prime mortgage loan, the borrowers behind these loans are usually reliable. Alt-A mortgage borrowers have good credit scores and may only be lacking proper documentation of their income. Without
that documentation, lenders can charge borrower higher interest rates, but still enjoy the stability that comes from a borrower with a good credit history.
Alt-A mortgages and the subprime mortgage crisis
In 2007, as the subprime mortgage crisis began, real estate analysts were also wary of Alt-A mortgages because of dubious income reporting practices. Because some Alt-A borrowers can’t verify their incomes, the loans were nicknamed “stated-income loans” or “liar loans.” At the time, some loan experts estimated that a quarter of Alt-A mortgages were going to subprime borrowers.
And unlike most mortgage loans, Alt-A loans are popular among investors, who often don’t live in the home they are purchasing. Some real estate professionals believe borrowers are less likely to default on their home loans if they actually live in the home.
Alt-A mortgages and HARP 3.0
The first iterations of the Home Affordable Refinance Program (HARP), a government program that helped underwater borrowers refinance their mortgage loans, did not include Alt-A mortgages. Only GSE-backed loans had access to the refinance opportunities of the program. In February of 2013, Senators Barbara Boxer and Robert Mendoza put forth the Responsible Homeowner Refinancing Act of 2013 to expand HARP to include Alt-A mortgage loan borrowers. The proposed revision, nicknamed HARP 3.0. has not been approved at this time.