What is Alt-A Mortgage?

Alt-A Mortgage may be referred to as a kind of loan that was given to borrowers whose credit scores were not good but not bad enough to qualify for sub prime mortgage loans. So, they were considered as riskier than prime mortgage loans but not as risky as sub prime mortgage loans.

What are the features of Alt-A Mortgage?

If you had applied for Alt-A mortgage, you didn’t have to produce too many documents. As far as credit score was concerned, people who had applied had a credit score less than 680 and the DTI or debt-to-income ratio was 35%. There were restrictions on the down payment. Borrowers could meet the down payments as they were backed with piggyback loans. As such a borrower could avoid PMI or mortgage insurance.

How do they differ from NINJA loans?

Alt-A Mortgage should not be confused with NINJA loans. In case of NINJA loans, a borrower doesn’t have to produce any documents and there were times when the eligibility conditions for getting NINJA loans were manipulated so that the borrower could qualify for one. In case of Alt-A Loans, the company offering these loans had kept the provision open so that they could check the income of the borrowers and his tax returns.

Rate of interest in case of Alt-A (mortgage was higher than prime mortgage rates but less than sub prime mortgage rates. Under certain circumstances, borrowers also availed interest rates more or less similar to interest rates enjoyed by prime borrowers. The default rate of Alt-A mortgage was higher since there credit checks were not done fully and there was manipulation of facts and assets.

Fate of Alt-A Mortgage loans

When recession set in 2007, borrowers of Alt-A mortgage were paying larger mortgage payments already. Comparatively, adequate equity was not building up as in the case of prime borrowers. And 2007 also witnessed tremendous downsizing and layoffs. There were many who lost their jobs due to which they failed to make payments. To add to the distress of the Alt-A mortgage borrowers, home values dropped miserably. As a result, the money owed by the borrowers exceeded the value of their homes. The distressed borrowers possibly couldn’t opt for refinancing as there was little or no equity left in their property.

In 2008, the sub prime mortgage defaults were coupled with Alt-A mortgage defaults. Alt-A mortgage lost their popularity during the same year.