In the 1990s, a lender called Headlands Mortgage pioneered what were then called “Alt A” mortgages.
The loans allowed borrowers to qualify for competitive mortgages without having to go through the rigmarole of a “full documentation” qualification.
In that high-rate era, “Alt A” interest rates were very close to the rates associated with full doc loans. This is because the market understood that those loans were as safe as full doc loans – IF reasonable underwriting guidelines (large down payments, excellent credit, and/or significant assets) were upheld.
Other lenders like WAMU and Wells Fargo jumped into the arena after seeing Headlands’ success, only to be followed by the entire subprime world (largely backed or owned by investment banks).
With so much competition (and the government getting involved – another story entirely), underwriting standards eroded and the industry ended up collapsing – something I have discussed many times.
HEADLANDS & LOW-RATE ALT A LOANS ARE BACK!
One of Headlands’ former senior executives started a new “Alt A” mortgage bank in the Headlands model about six years ago.
I recently ran into that executive/founder and he told me that his firm is not only going gangbusters but that the interest rates for the loans are coming down and getting closer and closer to “full doc” conforming rates.
In addition, he pointed out how his firm has again provided financing for thousands of borrowers who would otherwise not have come close to qualifying for traditional full doc financing.
NO BORROWER LEFT BEHIND
And – this is the point and purpose of this blog.
There are now myriad competitive financing options for “non-traditional” borrowers. I have hit this many times in the past in blogs about “non-QM loans,” but am hitting it again as a reminder because there are now more programs than ever, and the rates are getting closer to full doc/traditional lending rates.
INTEREST-ONLY LOANS: The exec/founder I discuss above mentioned that these are now among his most popular offerings, as many borrowers are just looking for short-term payment relief. He said his average loan amount is about $1.2 million, interestingly (but all loan amounts are OK), and that the average rate is in the low 4% range.
1099 LOANS: We constantly see W2’d or salaried borrowers go out on their own as “consultants” of sorts, and that makes them ineligible for traditional financing for at least two years or more in most cases (because they have to establish a self-employed income history). But now the Alt A firms offer 1099 loans that treat a borrower’s first year of 1099 income (the income reported by clients or customers) as equivalent to W2 income.
ASSET BASED LOANS: I blogged about these a few weeks ago, referencing “Asset Depletion” loans in particular – where lenders divide total assets by 84 to come up with an income figure. There are other variants of asset based loans, but the main point is that asset-rich borrowers (who lack traditional income) now have competitive options.
BANK STATEMENT LOANS: These are loans that allow borrowers to use their total bank statement deposits as income, e.g. add up the total deposits from the last 24 months of bank statements and divide by 24 to come up with the borrower’s monthly income.
As long as borrowers have a sufficient down payment (20% or more in most cases), there are usually numerous other financing options they can take advantage of – and the above are just a few.
Hence, borrowers (and agents) should not get discouraged if they (or their clients) don’t qualify for traditional financing – until all options are explored.
If you have questions about using alternative financing options to purchase a new home, contact our team! Our Client Advisors are alternative financing experts and can help answer any questions and match you with the loan program that best suits your financial needs. Our team is available to assist you seven days a week by phone at 855-855-4491 or email at [email protected].
