Ethical Homes

Alternative loans are non-conforming loans, usually for borrowers with poor credit histories.

Lenders often classify loans according to the risk they take on in making the loan; conforming loans are the safest, and any non-conforming loans are deemed Alternative loans or Alt loans, running in order of increasing risk to the lender from “A loans” (or Alt-A loans) to “B loans”, “C loans”, and (for the riskiest loans) “D loans”. As loans are sometimes also called “notes” or “paper”, lenders who provide alternative loans are often referred to by terms such as “B note lenders”, “C paper lenders”, etc.

Alt-A loans are usually needed for borrowers who just barely don’t qualify for a conforming loan (e.g. a borrower looking for a stated income loan who has a late mortgage payment within the last 12 months), and are relatively competitive with conforming loans in terms of rates.

Since there are relatively few B, C, and D paper lenders, on the other hand, there is significantly less competition among those lenders to force them to provide competitive rates, and the fact that borrowers with poorer credit are often both more desperate and less well informed about their options means that the lenders can get away with offering extremely high rates and unfavorable terms for borrowers.

While consumers should be very cautious about alternative loans, then, such programs do have their uses for an intelligent homebuyer. Buyers with low credit due to negative credit information that is due to be removed from their credit history in the next few years, for example, might want to use a B or C loan to allow them to purchase a property, and then refinance it with a conventional loan when their credit improves; such borrowers should make sure, however, that there is no significant prepayment penalty locking them into the alternative loan. Buyers with poor credit may also want to look into seller financing, or find a seller who is open to a lease-purchase option.