Alternative

Alternative Loans are also known as 'B', 'C' and 'D' paper loans.  These loans do not meet the borrower credit requirements of Fannie Mae and Freddie Mac.  Alternative loans are offered to borrowers that may have recently filed for bankruptcy, foreclosure, or have had late payments on their credit reports. The purpose is to offer temporary financing to these applicants until they can qualify for conforming 'A' financing. The interest rates and programs vary, based upon many factors of the borrower's financial situation and credit history.

Alternative Loans ('B' paper loans) provide an opportunity for home owners to demonstrate their ability to pay on-time mortgage payments. They include 2/28 and 3/27 loans, where the number before the slash refers to the number of years that the initial rate is fixed. After that time period, the rate changes, or adjusts, on a predetermined schedule, such as every 6 months, for the remainder of the loan. The adjusted rate is calculated using a mathematical formula based on the U.S. bond market. These loans usually have a two-year payment penalty which means you cannot refinance during that time. The benefit of a 'B' paper loan is that you are given two years to demonstrate your ability to make regular payments. After those 24 payments, lenders will be more willing to qualify you for 'A' paper loans with lower interest rates.

The other good news is that the market for 'B' paper loans is very competitive, so although your interest rate will probably be higher than if you had an 'A' paper loan, there are still good rates within the 'B' paper category.