A portfolio loan is a mortgage where the lender originates and retains the loan instead of reselling it on the secondary mortgage market. This could make it a useful home financing option for those who might not qualify for traditional mortgage loans due to their financial situation. However, portfolio loans also often come with higher interest rates and prepayment fees that may ultimately cost the borrower more overall.
If you recently applied for a mortgage loan with a low credit score, your lender may have mentioned financing through a “portfolio loan.” Maybe this sounded like a great opportunity at the time, but what does it actually mean for you?
A portfolio loan differs from a traditional mortgage because the lender retains the loan at the financial institution. This allows lenders to choose what loans they wish to finance, including those for borrowers with lower credit scores and down payments. However, this can sometimes mean higher interest rates and origination fees. Keep reading to learn what a portfolio loan is, how it differs from other loan options, and whether this is the right financing choice for you.
What is a portfolio lender?
A portfolio lender is a financial institution that finances mortgage loans in-house as a part of their investment portfolio instead of selling them off to the secondary market.
Unlike traditional lenders who sell the majority of their loans to re-purchasers like Fannie Mae or Freddie Mac. Portfolio lenders assume the risks of borrowers defaulting and choose to hold the loans themselves. In general, these lenders tend to be part of a local bank or credit union.
Because portfolio loans aren’t sold on the secondary market, they don’t need to meet the stringent criteria of conforming loans. Hence, portfolio lenders usually set their own borrowing guidelines and terms, which can appeal to lenders who aren’t able to meet traditional mortgage lenders’ requirements.
The loan criteria of traditional loans usually include a debt-to-income ratio of no more than 43%, a high credit score (usually above 620), and a minimum down payment of 20%.
How do portfolio loans work?
A portfolio mortgage is similar to a traditional mortgage in that you’ll need to make monthly payments on the loan until it’s completely paid off. However, unlike traditional mortgages, portfolio loans are originated by a lender and held in the lender’s portfolio. The lender retains the risk for the life of the loan, as opposed to selling it off to the secondary market.
These types of loans typically have a more flexible underwriting process and less demanding up-front requirements. However, they can also come with higher interest rates and origination fees due to the extra risk the lender assumes.
What is the minimum credit score of a portfolio loan?
Each portfolio lender can decide the level of risk it wants to take with a borrower. This variation also affects credit score requirements, which can vary by lender. Keep in mind that though the minimum credit score needed is typically lower than traditional loans, some portfolio lenders might still ask for high credit scores for certain property types. If you have poor credit, you might also have to pay higher interest rates and closing costs to offset the higher risk of default.
So make sure to do your research and shop around to find a portfolio lender that offers the best rates for your financial situation.
What is the interest rate on a portfolio loan?
Interest rates on portfolio loans can vary quite a bit depending on the lender. Although it is possible to get competitive rates with a portfolio loan, they usually have higher interest rates than conventional mortgages (expect to pay 1 or 2 percentage points more). So make sure to take your time and compare rates between different lenders. This can save you a lot of money on interest payments in the long run.
Who might need a portfolio loan?
Portfolio loans can be a great potential option for those who want to be homeowners but have trouble qualifying for traditional loan programs. They tend to be useful for borrowers who:
- Have high income but a bad credit history
- Need a loan larger than the conforming loan parameters ($647,200 as this year)
- Are self-employed
- Have gone through a bankruptcy or foreclosure
- Are facing liens or tax issues
- Are foreign nationals
What are the pros and cons of a portfolio loan?
Wondering whether portfolio loans could be right for you? Be sure to consider the following points before deciding on this kind of loan.
Here is a list of the benefits and drawbacks to consider.
- Looser qualifying standards. Because portfolio loans don’t have to follow the strict guidelines specified by secondary market buyers like Fannie Mae, the approval criteria are much more flexible. This means that it may be easier to get approved for a portfolio loan than for some other types of mortgages.
- Better customer service. Unlike traditional mortgages that are resold to investors in the secondary market, portfolio loans stay with the same lender from beginning to end. Without this transfer, borrowers get better and more consistent customer service experiences.
- Investor-friendly. Traditional mortgages typically restrict the number of properties you can purchase. Moreover, a traditional lender may only approve structurally sound properties. Portfolio loans, on the other hand, are less strict and don’t tend to have these requirements. This can be great for home investors who want to renovate and flip old properties or finance several investment properties at the same time.
- Prepayment fees. Portfolio loans can also come with prepayment fees, which can be inconvenient if you intend to pay off all or part of your loan ahead of schedule. The fee is essentially an incentive for you to pay back your principal slowly over a longer term, allowing lenders to collect more interest. But this also means a higher overall cost for you. So before originating a loan with a portfolio lender, make sure to negotiate for the lowest fee possible.
- Higher interest rates. Though easier to qualify for, a portfolio loan could end up costing you more in the long term than an equivalent conforming loan. This is due to high interest rates, as portfolio lenders take on more risk by holding loans in their portfolios instead of selling them on the secondary market. Also, to maintain their profit margins, lenders may increase their variable rates in response to the Federal Reserve’s increasing rates.
How do I get a portfolio loan?
Because portfolio financing can be risky for a lender, they aren’t usually advertised to the public. However, practically any mortgage lender is a potential portfolio lender. Instead of worrying whether a lender offers portfolio loans or not, focus on applying for a mortgage with multiple lenders and seeing which one will preapprove you for the best rates and terms.
What kind of loans can be portfolio loans?
Portfolio loans encompass a variety of home loans, including those that are too large or complex to sell on the secondary mortgage market. Here are some different types of mortgage loans that lenders sometimes keep as portfolio loans.
You can use a blanket mortgage to buy multiple real estate properties at a time. This can be especially attractive to borrowers who have a large portfolio of investment properties and worry about managing multiple mortgages.
Generally, lenders keep this type of mortgage in their portfolio for two because of the high loan amount or the number of properties involved that prevents it from being sold on the secondary market.
Jumbo portfolio loan
A jumbo portfolio loan is any mortgage loan that is too large to sell on the secondary market. Each year, the Federal Housing Finance Agency (FHFA) announces the conforming loan limits for mortgages to be acquired by Fannie Mae and Freddie Mac. As of 2022, in most of the U.S., this limit is set at $647,200 for one-unit properties.
Cash-out refinance portfolio loan
A cash-out refinance is when a homeowner decides to convert home equity into cash. To do this, the homeowners take out a new mortgage for more than they owe on the existing loan. They then receive the difference in cash.
A lender might decide to keep this type of loan in their portfolio because it either exceeds the conforming loan limits or it’s a blanket mortgage that can’t be resold on the secondary market.
- Portfolio lenders are financial institutions that originate mortgage loans and then keep that debt in their own portfolios.
- Because portfolio loans are not sold on the secondary market, they don’t need to adhere to the stricter guidelines of conforming loans.
- Portfolio loans generally can be helpful for borrowers who don’t meet the criteria of traditional loans.
- The advantages of a portfolio loan include looser qualifying standards, better customer service, and friendliness toward investors.
- The disadvantages of a portfolio loan are the higher interest rate and the additional prepayment fees that it comes with.
- The rates can vary quite significantly depending on the portfolio lender, so make sure to shop around for the most affordable option.
How to find the best mortgage loan for you
Choosing the right lender can be daunting due to the number of options available in the mortgage loan industry. But don’t worry, it doesn’t matter if your loan is a portfolio or secondary market mortgage. As long as you take the time to compare rates across different lenders, you should find the best mortgage loan for your financing needs.
Keep in mind that the rate quotes you see online are usually just an estimate, so make sure to get pre-approved by multiple lenders to receive accurate rates. This way, you’ll be able to make the most informed decision when choosing home purchase mortgages.
View Article Sources
- FHFA Announces Conforming Loan Limits for 2022 — Federal Housing Finance Agency
- How the Secondary Mortgage Market Works — FreddieMac.com
- 2021 Mortgage Industry Study — SuperMoney
- What is a Conforming Loan? — SuperMoney
- Home Purchase Mortgages: Reviews & Comparisons — SuperMoney
- Best Mortgage Lenders | March 2022 — SuperMoney
- What is the Secondary Mortgage Market and How Does It Work? — SuperMoney
- How to Finance a House — SuperMoney