What is a Portfolio Loan?

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.

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.

Blanket mortgage

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.

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.