An Alt-A mortgage could be described as mortgage for those with lower than good credit scores, and yet not low enough scores to justify a subprime rate. They are thus riskier lending than prime mortgages and not as risky as subprime loans. They’re also seldom available since the subprime mortgage crisis in the US, and lending restrictions have tightened to avoid people defaulting on mortgages.
There are several common features of the Alt-A mortgage. People who applied for them had more limited documentation requirements than did people applying for A-paper mortgages. Moreover, credit scores were usually less than 680, and people might possess a higher debt to income ratio than 35%. Another element of this type of mortgage was limitation on down payment, and many of these mortgages were structured with piggyback loans that would help people meet the down payment by taking out a second on third loan. This helped to avoid paying personal mortgage insurance (PMI).
These mortgages shouldn’t be lumped in with NINJA loans. NINJA loans, where documentation was never checked or was even falsified by lenders or borrowers, were usually subprime loans. Mortgage companies that offered Alt-A loans retained rights to check income tax returns and verify income.
Borrowers who obtained an Alt-A mortgage usually paid higher interest than prime rates, but these interest rates were less high than those offered with subprime loans. Some people with Alt-A mortgages were even able to get interest rates that were very close to prime. Nevertheless, rate of default was higher because not all facts about income and assets were fully checked.
The economic recession beginning in 2007 meant higher unemployment. Alt-A mortgage owners were already paying larger mortgage payments, while not building as much equity in their homes as prime borrowers did. If they lost jobs meeting mortgage payments could become very difficult. Declining home values also meant that numerous Alt-A borrowers were quickly upside down in their loans, and owed more money than their homes were worth. Typically the option of refinancing to lower payments wasn’t possible if homeowners had little to no equity in their homes.
Even when people retained their jobs, with increased expenses for products like food and gas, some customers simply could not meet their payments anymore and rate of defaults increased. After many borrowers had defaulted on subprime loans, banks and lenders experienced a second wave of default on Alt-A mortgages. By 2008, the Alt-A mortgage business had collapsed and many of the original lenders offering these loans closed their businesses.
With greater restrictions on lending and credit score, it’s very difficult, if not nearly impossible, to obtain an Alt-A mortgage today. This is considered unfortunate by some because there are still customers with less than perfect credit who might be able to qualify for Alt-A mortgages and remain faithful in paying their monthly payments. However assessing risk of default has dramatically changed since early 2007. In fact, inability to lend money to customers who would qualify for slightly under prime rates has created some of the issues with decreasing prices in homes. There are far fewer customers able to qualify for home loans, and thus fewer potential new home buyers to drive up housing prices.
