In order to answer your question, a little bit of background might be in order. At one point loans usually fell into three categories: “A” paper, subprime or government.
“A” paper refers to mortgages made on a full documentation basis to people meeting certain credit and income standards.
Subprime refers to mortgages made to people whose financial profile does not meet the requirements of the “A” paper lenders. Government loans are those that are insured by the Federal Housing Administration.
In connection with “A” paper, the standard was originally 680 credit scores, 20% down, a 2 year employment history, and debt ratios of 28/36. Anyone who could not satisfy those requirements would have to get either an FHA loan or a subprime loan. Later on, lenders figured out that they could relax their guidelines for people with good credit and still make money. And so, they developed “Alt-A” loans.
So, getting back to your exact question, an “Alt-A” loan is one that is made to someone with good credit, but who doesn’t meet the other requirements in connection with income documentation, down-payment or employment. Typically these loans required either reduced documentation or no documentation for either employment, income, assets or some combination thereof.
One variety is the “stated income” loan, where you could state your income, but your source of income and your assets would be verified. Then there is the “stated-income/stated-asset” loan, where neither your assets nor your income would be verified — all you had to do is prove a source of income and the amount of income stated had to be reasonable in comparison to its source. Thus, a cafeteria waitress could not state a yearly income of $150,000 and get approved for a stated income loan since it just doesn’t make sense.
For those whose stated income does not “make sense” there is the “no-ratio” loan. To get one of those, all you would have to do is show a source of income. The amount of income however, would be neither disclosed nor verified. You would also have to show sufficient assets to make the down payment and a certain amount of reserves, depending on the lender’s requirements.
Even farther in the reduced-documentation progression are “ no-income/no-asset loans,” “no-income/no-asset/no-employment” and “no-doc” loans. The documentation requirements for these types of loans are exactly as their titles imply. You can read a more in-depth description of “no-doc” loans here.
Because these types of loans were abused, the default rates associated with them skyrocketed. As a result, investors refused to buy bonds backed by these loans in the secondary market. They were perceived as being too risky. Consequently, just about every lender out there has stopped offering all “Alt-A” loans other than stated-income loans.
An Alt-A loan is a loan for those who fall just outside the realm of Conventional or what you may know as Conforming guidelines. Typically the rates aren’t quite as good, however these programs do offer flexibility that Conforming products don’t offer. For instance, a program where deposits into a bank account can actually count as income.
Another prominent feature of Alt-A loans is that often you can borrow more than 80% of the homes value and not have to worry about Mortgage Insurance. In recent times, Alt-A loans have shrunk tremendously as many of the lenders that specialized in them over the past few years have gone out of business. Now, FHA is the hot product out there now that is helping so many people through this mortgage crisis.