With most mortgages, the lender that originates the loan doesn’t actually hold on to the loan. Instead, it gets traded around the secondary mortgage market, which helps release capital and permit other prospective homeowners to gain access to money. You will find, however, some exceptions that don’t find yourself being traded. They’re called portfolio loans.
What is a portfolio loan?
A portfolio loan is a type of mortgage that a lender originates and retains rather than offloading around the secondary mortgage market. Appropriately named, a portfolio loan stays within the lender’s portfolio, never entering that web of behind-the-scenes buying and selling. Why does that matter? Because the lender reaches select the standards for the loans – what kind of credit rating they’ll approve and how much money they’ll offer to the borrower, for example – rather than adhering to the standards put in place by Freddie Mac and Fannie Mae.
How portfolio loans work
A portfolio loan has plenty that is similar to non-portfolio mortgages: You’re still likely to affect borrow a slice of money, along with a lender will assign a level of risk for you as a customer in line with the likelihood that you're going to be able to pay it back. However, portfolio standards often differ from Fannie Mae, Freddie Mac and government-insured loan requirements. Those tend to have rigid requirements around credit rating, deposit contributions and debt-to-income ratios.
For the lending company, a portfolio loan comes with one key difference: 100-percent liability when the borrower defaults. Since they're riskier propositions, plenty of portfolio loans may charge higher rates of interest and better origination fees for that borrower.
Pros and cons of portfolio loans
A portfolio loan can be a smart move — it may offer more liberal underwriting standards, need a lower credit rating and a smaller deposit and permit you to borrow a lot more than you can with another type of mortgage. In some cases, though, you may not want one. Here’s a rundown from the benefits and drawbacks of portfolio loans:
- A wise decision for those who have poor credit. Let’s say that a period of misfortune pushed down your credit score — maybe you’ve had a couple of months of low income or unemployment, or both. Financial hits like this don’t look great on paper, to not be able to get a typical mortgage. For those who have a history of solid credit and consistent income otherwise, a bank may agree to provide you with portfolio financing for any home, and with more flexible underwriting. It’s also why portfolio loans could be strong candidates if you need to refinance but your credit isn’t great.
- Helpful for self-employed borrowers. Being your own boss can be a good feeling – before you affect borrow a big chunk of money for a home. Traditional mortgage brokers will like to see steady employment, so a fluctuating income from independent contracting work or a small company might hold up the application. Portfolio lenders tend to be more willing to work with self-employed individuals .
- Good for real estate investors. Many portfolio lenders are community banks with a link with a place – a helpful characteristic legitimate estate investors looking to buy distressed properties for any fix-and-flip profit. So, if you’re looking for financing to assist your real estate investing strategy, portfolio loans can be especially attractive.
- More flexibility. One of the big differences between conforming loans and non-conforming loans (the classification that portfolio loans tend to fall under) is the fact that borrowers can do things they can’t do with conventional loans – borrow more money, put less down and potential avoid mortgage insurance despite smaller down payments.
- The potential for a much higher interest rate. Remember that having a portfolio loan, the lending company is losing the chance to resell the debt in to the secondary market. That’s a chance cost, and also the lender may well want a higher interest rate to make up for it. The lender could also charge a greater interest rate in exchange for more flexible underwriting and much more risk.
- Costly fees. A lender might charge higher fees on the portfolio loan. Since they’re offering greater flexibility to borrowers who might not be able to qualify elsewhere, they can use that capacity to their advantage. To put it simply, borrowers have limited choices to compare.
- Not always flexible. A portfolio loan is made to take place through the lender until the rentals are refinanced or sold, but may, a lender will need the choice to market the loan later on. In that case, it might produce a portfolio loan within Fannie Mae or Freddie Mac standards, so a borrower will have to meet many of the usual underwriting requirements. In this case, there’s little benefit to a borrower with poor credit, a treadmill who needs a jumbo loan.
How to get a portfolio loan
You likely won’t find portfolio lenders simply by comparing home loan rates. Whether you’re looking to purchase a new home or refinance your existing mortgage, you’ll have to do a bit more digging to locate lenders that provide portfolio loans. Among the best routes is to make use of a large financial company, who works to match your specific needs with lenders that may meet them. Additionally, you need to look into neighborhood banks in your town to see if they keep loans on their own books. Just be sure you compare portfolio loans with traditional options, too, to make sure you obtain the best deal.
ON THIS PAGE
- What is a portfolio loan?
- How portfolio loans work
- Benefits and drawbacks of portfolio loans
- Tips to get a portfolio loan