What are B, C and D paper loans?

B, C and D paper loans are all types of alternative, or non-conforming, loans usually for borrowers with poor credit. The term "paper" simply refers to the fact that when a lender makes a loan, it takes back a promissory note and security interest such as a mortgage - which are pieces of paper. Put simple, B, C, and D loans (as well as A loans) are sub-prime loans.

Lenders like to classify loans according to risk. First they divide them into conforming and non-conforming loans. Conforming loans are the safest. Non-conforming loans are more risky and are alphabetically classified according to risk. Non-conforming A loans are less risky than B loans which are less risky that C loans which are less risky than D loans. There are no loans with lower classifications.

There are far fewer lenders who want to make Alt-B, C, and D loans (though the market is growing), so there is less competition for these borrowers causing interest rates to be higher. That these borrowers are seen by lenders as more risky and more desperate also pushes up the interest rates with these non-conforming loans.

Sometimes alternative loans can be predatory, but they can also have their place for homebuyers with less than perfect credit. For instance, if a homebuyer has poor credit because he has some recently paid debts that will come off his credit report in the next few years, he can get an Alt-B or C loan and make timely payments on it. This will improve his credit and allow him to refinance for a conforming loan faster than if he just pays off the old debts and waits until he is able to qualify for a conforming loan. Borrowers in this situation should be careful that there are no significant pre-payment penalties, which are common with non-conforming loans, preventing them from refinancing.