Alt-A Mortgages

Definition

Alt-A Mortgages are residential property-backed loans made to borrowers who have better credit scores than subprime borrowers but provide less documentation than is normally required for a loan application. These mortgages typically have features between those of prime and subprime loans.

Examples

Scenario One: A borrower with a fair credit score of 680 wants to buy a property but can only provide partial documentation of their income. They might qualify for an Alt-A mortgage because they do not fully meet the strict criteria for a prime mortgage.
Scenario Two: An entrepreneur with fluctuating income only shows their business earnings over a short period instead of the standard two-year proof. They receive an Alt-A mortgage, which generally demands less documentation than prime loans but more security than subprime ones.

Frequently Asked Questions

1. What is the primary difference between Alt-A and subprime mortgages?

Answer: The primary difference is the borrower’s credit quality. Alt-A borrowers generally have higher credit scores than subprime borrowers and thus receive better interest rates. However, Alt-A loans may still involve less stringent documentation requirements compared to prime loans.

2. What types of documentation are typically reduced for Alt-A borrowers?

Answer: Alt-A borrowers might face relaxed requirements, such as limited income verification and fewer asset documentation requirements than those for a prime loan.

3. Are Alt-A mortgages riskier than prime mortgages?

Answer: Yes, they are considered riskier than prime mortgages but less risky than subprime ones. This is because they involve lower documentation levels, posing a higher risk from the lender’s perspective compared to well-documented prime loans.

4. How do interest rates on Alt-A mortgages compare to prime and subprime loans?

Answer: Interest rates on Alt-A mortgages generally fall between the best rates available for prime borrowers and the higher rates provided to subprime borrowers.

5. Can self-employed individuals benefit from Alt-A loans?

Answer: Yes, self-employed individuals, who may have varying and harder-to-document income streams, can often benefit from Alt-A mortgages due to the less stringent documentation requirements.

Prime Mortgage: A mortgage loan given to borrowers with an excellent credit score and a thorough documentation of income and assets.
Subprime Mortgage: A loan offered to individuals with low credit ratings and posed higher risk, thus typically having higher interest rates.
Credit Score: Numerical expression based on a level analysis of an individual’s credit files, used to represent the creditworthiness of the individual.

Online Resources

References

“The Mortgage Professional’s Handbook” by Jess Lederman & Thomas Wenning
“Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis” by Mark Zandi
“The Foreclosure Survival Guide: Keep Your House or Walk Away With Money in Your Pocket” by Amy Loftsgordon

Suggested Books for Further Study

“Real Estate Principles” by Charles Floyd and Marcus Allen
“Guide to Understanding Mortgages and Foreclosures” by Clifford Turner
“All About Mortgages: Everything You Need to Know” by Julie Martins

Real Estate Basics: Alt-A Mortgages Fundamentals Quiz

### Alt-A mortgages typically fall between which two types of loans? - [x] Prime and Subprime Mortgages - [ ] Subprime and Predatory Loans - [ ] Prime and Conventional Loans - [ ] Fixed and Adjustable-Rate Mortgages > **Explanation:** Alt-A mortgages are categorized between prime and subprime mortgages based on the borrower's credit score and the level of documentation provided. ### What is a common feature of Alt-A mortgages related to interest rates? - [ ] They offer the lowest interest rates available. - [x] They offer interest rates higher than prime but lower than subprime mortgages. - [ ] They have adjustable interest rates only. - [ ] They offer government-subsidized interest rates. > **Explanation:** Interest rates for Alt-A mortgages are typically higher than prime mortgages but notably lower than subprime rates, reflecting the intermediate risk they pose. ### What main criteria do Alt-A borrowers generally meet compared to subprime borrowers? - [ ] Higher income levels - [x] Better credit scores - [ ] More comprehensive employment history - [ ] Only fixed income sources > **Explanation:** Alt-A borrowers usually have better credit scores than those who qualify for subprime loans, though they may still provide less documentation. ### Who might find Alt-A loans particularly beneficial? - [ ] Retirees - [ ] Full-time employed individuals only - [x] Self-employed individuals - [ ] Individuals with immaculate credit scores > **Explanation:** Self-employed individuals, with variable income streams and often less traditional financial documentation, find Alt-A loans beneficial due to more flexible requirements. ### Which of the following conditions generally does *not* describe an Alt-A mortgage applicant? - [ ] Fair to good credit scores - [x] Fully documented earnings and assets - [ ] Less strict documentation requirements - [ ] Income verification is sometimes limited > **Explanation:** Alt-A mortgage applicants often have less documentation than fully documented prime mortgages, aligning them closer to subprime for the level of verification required. ### Are Alt-A mortgages considered as riskless as prime mortgages? - [ ] Yes - [x] No - [ ] They offer zero risk - [ ] They are less risky compared to prime mortgages > **Explanation:** Alt-A mortgages are not as riskless as prime mortgages due to the reduced documentation, but they offer less risk than subprime loans. ### What types of documents might be limited for Alt-A mortgage approval? - [ ] Employment contracts - [x] Income and Asset Verification documents - [ ] Home inspection reports - [ ] Bank statements > **Explanation:** Alt-A mortgages typically require less stringent income and asset verification compared to prime loans, making them more accessible to self-employed or fluctuating income borrowers. ### How do lenders typically view Alt-A mortgages compared to prime mortgages? - [x] Higher risk with higher interest - [ ] Lesser risk with higher security - [ ] Equivalent security with lower returns - [ ] Lower risk with fixed returns > **Explanation:** Lenders view Alt-A mortgages as higher risk compared to prime mortgages due to the reduction in documentation, resulting in higher interest rates as compensation. ### What primary advantage do Alt-A Mortgages offer self-employed individuals? - [ ] Immediate loan approval - [ ] The lowest available interest rates - [x] Less stringent documentation and income verification - [ ] Full government backing > **Explanation:** Self-employed individuals often benefit from the less stringent requirements for documentation and income verification with Alt-A mortgages, offering more loan accessibility. ### What is one reason a borrower might choose an Alt-A loan over a prime mortgage? - [ ] Invest in commercial properties - [ ] Directly access government benefits - [x] Face fewer documentation hurdles - [ ] Secure a fixed interest rate only > **Explanation:** Borrowers choose Alt-A loans often because they face fewer documentation hurdles, offering a solution for those with variable income or partial verification capabilities.