I keep hearing a lot about Alt A loans in the financial news lately. It seems as though media hype over the subprime mortgage crash has lumped a very important set of loan programs into being 'bad' - the Alt A loan. Alt A stands for Alternative A and means A rates and programs for good credit borrowers who either are self employed or receive a 1099 as their paycheck. These loans are not 'bad.' Let me explain.
Mortgages in the past have been designed for folks who have real jobs. In other words, if you worked 9-5, and got a regular paycheck you were eligible for a mortgage. To prove your eligibility a lender would need to see your income tax returns, W2's, pay stubs, bank statements and any other asset documentation you might have.
Over time, our society has changed and more and more of us are self employed, or get our money in different ways than a regular paycheck from our employer. If mortgages are set up for someone with a W2 and paycheck, then how does someone, such as yourself, if you are in this category, get a mortgage? Well the answer is an Alt A loan. Alt A loans come in the form of Stated Income/State Assets and No Documentation (or 'No Doc').
You are self employed, you make good money, but write everything off. Alt A loans are designed for this situation. While writing things off is a good tax idea as it lowers the amount of taxes you have to pay. At the same time, the bad news is that it also lowers your bottom line figure for adjusted gross income on your tax returns. This bottom line income figure is what the lender uses to calculate your income. If you are self employed, next to credit, this is the most critical piece in determining if you can qualify for a mortgage going full doc or Alt A.
Stated Income Loans - Alt A lenders allow you, if you are self employed or receive a 1099 to simply state the amount of money you make a year, or in some cases to state the amount of assets you have in the bank. There are some criteria that you need to meet however. You must have good credit and be able to prove that you have a way to make the income you say you are making. To prove income you must either provide a business license, a contractor's license, a professional license (i.e. a law license) or a CPA letter. The CPA letter is from your accountant (they must be a CPA, not just a tax preparer) and it must state that you are self employed along with some other requirements. You will need to show a two year track record in your business. For the other requirements in the CPA letter, consult with your loan officer as it might be different given the lender you are using.
Will I pay a higher interest rate for an Alt A loan than if I could get a regular mortgage? In some cases the rates can be the same. This usually occurs where you put more money down on a property that you are purchasing. But most of the time, the rate is a little higher. Why it is higher is that the loan itself is a little more risky because you are just telling the lender how much money you make versus proving it. The case is also true if you only stating your assets and not proving them; you will have a higher rate.
Another form of Alt A is the No Doc loan. With this loan, you are qualified solely based on your fico score alone. That's right, no other documentation needed - no CPA letter, no stating income or assets at all. In fact your loan application is practically blank except for your credit accounts, your current address and a few other items.
It used to be prior to the summer of 2007, that you could get 100% financing with a no documentation loan. This has changed since the subprime crash. You can still get a no doc loan but you must put at least 10% down. We in the industry are expecting that in the near future, you will have to prove your assets no matter what kind of loan you get.
It seems too easy. Well, this is the pitfall of this loan; you stating your income. You could get in over your head by over stating your income which could allow you to get a house that has too high of a payment for you. Underwriters do have discretion to look at your stated income and agree or disagree with it. They do check national averages and if you state something that doesn't look right to them, they can turn you down. Lenders aren't stupid; they want to protect themselves from loan defaults. Taking a property back from you is very expensive for them so they will do whatever they can up front to make sure that their lending practices are sound.
I do believe that there is a place for the Alt A loans. Like I said earlier, the working culture for a majority of American workers has shifted from W2 employment to self employed. The self employed borrower needs the outlet and the opportunity to achieve the American Dream - Owning a Home.
Article by Dave Mason, Mortgage Broker
