Credit categories dictate mortgage loan products

If you’re wondering how lenders decide which loan products to offer to which borrowers, you might want to learn more about mortgage credit categories, which include Plus, A, Alt-A, B, C and D.

High credit score can smooth loan process
While guidelines may differ slightly from one lender to the next, borrowers in the Plus category typically are offered the very best available combination of interest rate and terms. These well-positioned borrowers, who typically have a credit score of at least 720, also may be able to obtain a mortgage more quickly and with less documentation than other borrowers can expect.

The next-best loan products are those in the A and Alt-A categories, which typically are offered to borrowers who have credit scores in the neighborhood of 680-720 for A-quality and 650-680 for Alt-A-quality products. The difference between A and Alt-A may be as little as 10 points on your credit score or whether your income will be documented or only stated on your loan application. Either way, the difference will depend on the guidelines for specific loan products.

B, C and D-quality loan products generally entail higher mortgage interest rates and higher closing costs to compensate the lender for the statistically higher risk of lending to borrowers who have lower credit scores.

Some people also use the terms "prime," "subprime" and even "non-prime" to describe categories of borrowers or loans, though these terms tend to be ill-defined. "Prime" may refer to loans offered to borrowers who have good credit while "subprime" may refer to loans offered to credit-impaired borrowers. And while some lenders might equate Plus and A to "prime," the terms "subprime" and "non-prime" can’t be definitively matched to the more specific B, C or D categories.

Larger down payment can offset lower credit score
While your credit score is important, it’s not the only factor that determines which loan products you’ll be offered. The dollar amount of your down payment, the ratio of your loan amount to the purchase price of the home you want to buy, and the ratio of your monthly debts to your monthly income are also important and may be weighed more heavily for borrowers who have lower credit scores.

For example, a borrower whose credit score was only 520 might still be offered somewhat more attractive pricing or terms if his or her debt-to-income ratio was low and he or she could make a down payment of, say, $30,000 to buy a $100,000 house. The low debt-to-income ratio and high loan-to-value ratio might mitigate the risk of the relatively lower credit score from the lender’s point.

Multiple factors determine loan products
Borrowers needn’t worry about the finer points of differentiation among mortgage credit categories. The more important point is that your credit score, down payment, loan-to-value ratio and debt-to-income ratio are all important factors that should determine which loan products you’ll be offered. The less risk that’s built into your personal situation, the better-positioned you’ll be to save when you obtain a home loan.

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