Alternative Mortgages - There’s a lot more out there than your father’s 30 year fixed rate mortgage. There are loans for people who expect their incomes to rise significantly, there are loans for people with little or no down payment and there are loans for people who plan to move in a couple of years.
Alternative documentation - "I cant prove all of last years income. What is alternative documentation, and is it legal?"
Alternative Credit Grading for 1st Time Homebuyers - If you have lived at home or have no rental history you can still get mortgage financing for purchasing your new home.
Many times being a first time home buyer and having limited credit you are still able to qualify for a home loan. Some lenders will allow you to use alternative credit in order to qualify in these cases. Alternative credit would be using letters from utility companies, phone companies, cell phone providers, non credit reporting loans, renters (verification of rent form, VOR's), etc... These can generally be used to show a positive credit history and as an alternative credit option for 1st time home-buyers with a limited credit history.
One way to qualify for a mortgage with little or no credit history is to provide a sizable down payment. A down payment of 5% to 10% of the purchase price will often qualify you for a mortgage. Be sure to ask you preferred mortgage professional if a larger down payment will help you qualify for a home loan.
Even if you have no credit score because you have never had any credit, there are mortgage programs designed for you.
When using alternative credit to help establish payment history, you will need at least two or three accounts to show your ability and willingness to pay. You will also need statements and cancelled checks for this.
Some sources of alternative credit can be a cell phone, cable bill, utilities, and insurance. Basically, anything that you have a monthly payment can be used as alternative credit. Once you have a 12 month history for these accounts your mortgage broker will created a supplemental credit report through the three credit repositories showing that these payments have been on time for 12 months.
Lenders usually look more favorably on borrowers with no credit than those with below average credit. Borrowers with no credit are usually offered rates compared to borrowers with good credit. However, they must prove they are responsible through what is called Alternative Credit Grading. Lenders will grade your credit based upon accounts usually not found on a traditional credit report.
What is Alternative Credit? - Alternative credit is an option available for borrowers with little or no credit history. Alternative credit usually is in the form of a letter from the company that holds an account that does not normally report to credit bureaus.
Examples of accounts that may qualify as alternative credit are are cellphone accounts, cable TV accounts, car insurance and even cancelled rent checks all can be used as alternative credit. However they all need to be paid on time in the last 12-24 months.
You may also here mortgage professionals refer to alternative credit such as cell phones and cable TV as Alt trade lines. This is an excellent way for someone with very little established good credit to prove their credit worthiness to a lender. It's all about building a case for yourself to the lender. Knowing how to package your information to the lender is a better portion of the mortgage broker's job.
These Alternative Credit programs are very useful for Foreign Nationals, who traditonally will not have established credit since they have just come to the United States.
Banks make a distinction between loan applicants with no credit history and those with bad credit history. Non-prime lenders are usually the only source of mortgage financing for loan borrowers with bad credit profiles, whereas home buyers with little or no consumer credit history can often get home loans with Alternative Credit features from banks. Mortgage brokers are a good source for Alternative Credit mortgage programs.
Another example of a borrower who may need to use Alternative credit would be someone who did a bankruptcy and never re-established any credit accounts. Sometimes after a bankruptcy people feel it is better to pay cash for everything and not get any more credit accounts. This is not true as it is important to re-establish your credit after the BK.
Homeowners and prospective buyers with limited credit histories or artificially reduced Fair Isaac (FICO) credit scores may now obtain alternative credit reports and scores based on the timely payments they make to landlords, utilities, telecom & cable companies and other recurring accounts which may not be included in their national credit bureau file, even child support & payday loans.
One program that was designed for limited credit depth is Fannie Mae's "My Community" program that will allow up to 100% financing. You should discuss this program with your broker to see if it is right for you.
Most lenders that allow for non traditional credit are offering very attractive rates, even at 100% LTV. You will most likely have to pay mortgage insurance, but that can usually be removed within one to three years, if you live in an area with normal appreciation.
Alternative income documentation - There are many mortgage programs that allow for alternative income documentation. Alternative income documentation is using non-traditional methods of documenting income. Traditional methods would be using pay-stubs, W2 forms and income tax returns. An example of alternative income documentation would be to use a 12 months bank statement program to document income.
You may also elect to choose a stated income loan instead of providing W2's or tax returns to expedite the processing of your loan. With a stated income loan you state your actual income on your loan application but usually the most documentation the underwriter will want is to get a verbal VOE or a copy of your business license to prove you have a job currently and you have had a job for the past 2 years.
Taking this one step further you may also choose to go the stated income/stated asset route. Most lenders require some type of reserves and on stated asset you are not required to show this money.
Alternative income may be stated income, stated assets, 12 month bank statements personal or business, 24 month bank statements personal or business, no income no asset loans and no ratio loans.
When using bank statements as proof of income, some lender banks use the average gross deposits as total income, others use net deposits. Net deposits are gross deposits minus withdrawals. Naturally, a borrower is considered to have higher income if a bank does not include withdrawals in its income calculation. Transfers from one account to another are usually not considered as income.
Alternative income is another way to qualify for a loan. If you cannot qualify the traditional way with paycheck stubs and tax returns the lenders will still work with you. There was at one time a lot of money being lost due to turned down loans because of income. Lenders recognized this and have made adjustments to there lending guidelines. Now there is alternative income, stated income, no income no asset... Just to name a few.
What is Alternative Documentation - Alternative Documentation is xpedited and simpler documentation requirements designed to speed up the loan approval process. Instead of verifying employment with the applicants employer and bank deposits with the applicants bank, the lender will accept paycheck stubs, W-2s, and the borrowers original bank statements.
Alt A and subprime lenders also allow other documentation types such as bank statements, business bank statements, and/or verifcation of employment to satisfy income documentation requirements. Check with your broker to see what programs will work best for you.
Another option to consider if it is difficult or impossible to verify your income, employment and assets is to No-Doc. A No-Doc loan requires No Documentation of income, employment or assets. You do need a good credit score to go No-Doc and will pay a slightly higher interest rate in some cases but if verification of income, assets and employment is a problem, consider going No-Doc.
Only in recent years have we as mortgage professionals been able to work with alt doc type loans. In the past you had to put down 20%, provide proof of everything and have great credit to buy a home. Now we have to ability to pick from multiple loans programs that fit just about anyones profile.
A good example of a borrower who would need to use alternative documentation would be a plumber who works a regular 40 hour per week job but also works after hours and weekends doing "side" jobs. Many such folks earn a significant portion of their overall income this way and would have a difficult time proving this income with traditional methods.
Alternative Documentation (Alt Doc) loans differ from Full Documentation (Full Doc) loans in that Alt Doc loan programs do not require the usual income and assets verifications from a third party (the applicant's employer or the depository bank where the loan applicant keeps the down payment funds). Full Doc loans often require such third party verifications and therefore the underwriting process takes longer.
Any alternative credit accounts you use must have a good payment history and be open for a minimum of 12 months. Canceled rent checks can also be used for an alternative crdit account.
It is now possible to obtain an alternative credit report accredited by the National Credit Reporting Association (NCRA).
Fannie Mae's "My Community" program was designed for first time home buyers with limited credit depth. This program will allow up to 100% financing with little or no credit. You will still have to show at least 4 alternative tradelines but your interest rate is much better than going with a sub prime lender.
Many times alternative documentation is used for borrowers with no or low credit scores. This is also helps new homebuyers obtain a mortgage for their new home.
Alternative documentation refers to the documents that the lender requires during the lending process. Less information is needed from the borrower regarding income and asset verification. Alternative documentation can speed up the loan process.
The usefulness of this documentation type is obvious; it allows the borrower to speed up the process for underwriting. While you may ask your loan agent for this type of documentation, certain restrictions may apply in order to qualify.
Alternative documentation types can allow borrowers with non traditional sources of income to qualify for loans.
