What Is a Portfolio Loan and How Does It Work?

What Is a Portfolio Loan and How Does It Work?

A portfolio loan, also known as a portfolio mortgage, is a mortgage that the lender (like a bank, credit union or online lender) keeps in-house in its own loan portfolio. This means that the lender both originates and maintains the mortgage rather than selling it on the secondary market. 

Most mortgages sold are conventional (or conforming) mortgages. That is, they “conform” to the borrowing requirements set by Fannie Mae and Freddie Mac. But a lender won’t sell a portfolio loan, so the lender can set its own standards. This way, people who may not qualify for a conventional mortgage loan may be able to still get a mortgage.

Why are mortgages sold?

Most mortgage lenders can’t carry an unlimited amount of debt on their books and need capital they can then lend to other borrowers. To generate liquid capital and keep lending, a real estate lender will sell your mortgage on the secondary market.

So how do mortgages get sold? Usually, mortgages are bundled with other mortgages into a financial package called a mortgage-backed security. Federally backed companies Fannie Mae and Freddie Mac are two of the major investors that purchase mortgages. They do this to keep the money flowing in the mortgage industry so more people will be able to finance and own homes.

Will selling a mortgage affect the borrower?

Selling a mortgage doesn’t affect the terms of the loan for the borrower. The only thing that sometimes changes is that the borrower may need to send their monthly mortgage payment to a different mortgage servicer.

Borrowers Who Can Benefit from Portfolio Loans

Portfolio loans can benefit borrowers because the lender can set the borrowing requirements instead of conforming to criteria set by Freddie Mac and Fannie Mae. Several scenarios where a borrower could benefit from a portfolio loan over a conventional mortgage include:

• Borrowers with a bad credit score or high DTI: Applicable after a period of unemployment or another situation that temporarily derailed their finances, resulting in numbers that don’t meet conventional mortgage requirements
• High earners with low credit scores: For borrowers who may have a high-paying job, but have issues making monthly payments on time.
• Self-employed or freelance borrowers: A borrower may have a sufficient credit score and assets, but might lack steady income. A portfolio loan could be an option, or the borrower could consider a bank statement mortgage.
• Good customers of the lender: Sometimes, a lender will only offer a portfolio loan to their best, most reliable borrowers, or to someone they want to have a better relationship with, like a local business owner.
• Buyers who need a larger loan: If a borrower needs a larger loan amount than they qualify for or needs a mortgage larger than a jumbo loan, a portfolio loan could be an option.

Advantages of Portfolio Loans 

Portfolio loans have some distinct advantages. Some of the pros of portfolio mortgage loans might include:

• Approval rates: A portfolio lender may be more lenient in approving mortgages. For instance, the borrower may not have to meet standards for a minimum down payment, carry primary mortgage insurance (PMI) for a smaller down payment, loan limits or a minimum credit score.
• Flexible terms: The lender can tailor the loan to the borrower’s needs with custom terms like bimonthly payments or a balloon payment. The lender might also allow a borrower to finance more properties than would be allowed with a conventional mortgage.

Disadvantages of Portfolio Loans

Some of the possible cons of portfolio mortgage loans include:

• Higher interest rate: Mortgage rates tend to be higher for portfolio loans to compensate for the risk the lender has to shoulder by having the loan on their books.
   
• Fees: The lender might not be making as much money with the portfolio loan as they would with conventional loan. So, the portfolio lender may charge higher fees, like a higher prepayment fee, to make up some of the difference.

How To Get a Portfolio Loan

Portfolio loans can be difficult to get because they are generally unadvertised. And the loan requirements could be easier or more stringent, as they are up to the lender. How, then, is a borrower supposed to get a portfolio loan? Here are some tips on finding a portfolio lender:

• Build rapport with your financial institution: The better customer you are and the more personal your relationship with your lender, the more likely that you can ask for and receive a portfolio loan. This may be easiest to accomplish with a local lender.
• Compare rates, fees and terms: Be sure to shop around for the best interest rate and terms on a portfolio mortgage loan just as you would for any real estate loan.
• Seek advice from an experienced professional: Ask a financial advisor for recommendations about how and where to find portfolio loans.

Is a Portfolio Loan Right for You?

With a little bit of legwork, you may be able to secure a portfolio mortgage loan. Be sure to work with trusted, reputable lenders and keep on top of your finances to make them as strong as possible.