An Alt, or Alt-A, mortgage is a type of mortgage loan in which the borrower's credit score falls short of what mortgage lenders would consider as prime, but is not so low as to be considered subprime. Alt-A mortgages are defined in different ways by different lenders. The term is primarily used when lenders repackage mortgage loans to sell to investors on the secondary mortgage loan market. Investors will pay less for a group of Alt-A mortgages than for a group of prime mortgages.
Although there is no single definition for Alt-A mortgages, they tend to be limited-documentation loans. This means that the borrower may not have all the documentation he needs, such as proof of income for three years, to qualify for a prime-rate loan. Some Alt-A loans are self-certification loans, meaning the borrower may have a good credit score but does not want to provide the paperwork normally required for a prime loan. In this case, the borrower signs an affidavit stating that he meets the income and asset requirements for the loan, but he does not have to prove his income.
Credit scores are a measure of a person's creditworthiness -- how likely he is to be able to pay back a loan, based on past history. Credit scores normally range from 350 to 850, with anything above 720 often considered sufficient to qualify for a prime-rate mortgage loan. In general, Alt-A loans are given to people with credit scores between 620 and 720; those with scores below 620 usually qualify only for more expensive subprime loans. Some Alt-A borrowers may have credit scores above 720 but short credit histories, which can disqualify them from obtaining prime-rate loans.
Low Down Payment
Another feature of Alt-A loans is that they often come with a low down payment, or even none at all. This increases the risk to the lender, because the borrower has little equity in the property -- making it easier for him to walk away or foreclose if he's having trouble meeting the payments. Many Alt-A loans also allow borrowers to have higher debt-to-income ratios than would be allowed for prime-rate loans. This also increases the risk to the lender, as borrowers with high levels of debt are more likely to fall behind in their mortgage payments.
Many Alt-A loans come with interest rates that are higher than those on prime-rate loans. Alt-A loans also often come with variable interest rates, in which the interest rate is low for the first two or three years compared with prime rate loans, but then rises steeply. This can also increase the risk to the lender, as borrowers may be more likely to default on their loans once the higher interest rate kicks in. In fact, this was a major cause of the real estate crash of 2008, as millions of people with Alt-A loans found they could no longer meet their monthly mortgage payments.
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