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- If you don't qualify for a conventional or government-backed mortgage, a portfolio loan may be an option.
- Portfolio loans may have more lenient standards for credit scores, DTI ratios, or maximum borrowing amounts.
- However, portfolio lenders can charge more because they take on greater risk than traditional lenders.
Atypical homebuyers, like real estate investors, may be interested in portfolio loans. Unlike with conventional mortgages that are resold on the secondary market, lenders originate and retain portfolio loans themselves, which affects the process for borrowers.
Portfolio loans may be more flexible thanks to lower underwriting standards. However, they also can come with higher fees and interest rates. Here's how portfolio loans work, who should consider one, and the potential benefits and drawbacks to consider.
Understanding portfolio mortgages
Portfolio mortgages can be used to purchase a home or investment property, allowing you to spread the cost of the home out over time — usually up to 30 years. The difference between these loans and conventional loans, though is they are:
Kept and serviced by the lender
Many mortgages are sold on the secondary market to government-sponsored enterprises (GSEs) including Freddie Mac and Fannie Mae. They buy conventional mortgages from lenders to create more liquidity, stability, and affordability in the housing market.
A portfolio loan, on the other hand, is a mortgage issued by a bank that keeps the loan on its balance sheet (i.e., in its own portfolio) rather than selling it, explains Mason Whitehead, branch manager at Churchill Mortgage in Dallas.
More flexibility in underwriting
Because lenders are selling these loans to Fannie and Freddie, conventional loans must adhere to rigid requirements when it comes to the borrower's credit score and debt-to-income (DTI) ratio, as well as their minimum down payment. The same goes for loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
A portfolio lender doesn't have to follow those guidelines because the loan stays on its own balance sheet. Lenders can set their own qualification guidelines and the minimum or maximum amount you can borrow, the interest rate it charges, and more. This can offer more flexibility to borrowers and, for some, make it easier to qualify. It's also possible a portfolio loan could offer you customized terms, such as biweekly payments.
Why choose a portfolio loan?
Many borrowers can benefit from using a portfolio loan. You might want one if you:
Have an unusual income or credit situation
Because lenders aren't selling the loan, they can qualify borrowers in different ways. For example, they may be able to accept bank statements rather than tax returns or W-2s when evaluating a borrower's income. They also may look at the potential rental income of a property, if you're investing.
This makes portfolio loans more appealing to certain borrowers, such as those who don't have excellent credit or proof of steady income. "An example of this could be a borrower who is self-employed for less than two years but has a strong business and cash flow," Whitehead says.
Need a jumbo loan
Conventional loans are also capped at a certain amount, per Freddie Mac and Fannie Mae's guidelines. Portfolio loans aren't subject to these limits, and lenders are able to loan more than these amounts. This can make it easier for you to buy a property in a high-cost housing market or, potentially, buying a larger, multi-unit property.
Are buying investment properties or multiple properties
Because portfolio lenders generally don't restrict the number of properties you can purchase or require a certain property condition, investors may benefit from portfolio loans. This can make it easier to finance the purchase of a fixer-upper, for example, or multiple properties if you're looking to become a landlord.
Considerations before getting a portfolio loan
As with anything, you'll want to consider portfolio loan's pros and cons before using one.Some downsides of these loans include:
Potentially higher interest rates
When issuing a portfolio loan, a lender doesn't necessarily have to follow the same eligibility requirements as it does when issuing a conventional loan, which can offer more flexibility to borrowers.
At the same time, this also makes these loans riskier for the lender, as there may be a higher chance of default. To account for this risk, lenders often charge more in interest and higher fees than a conventional loan.
Down payment requirements
Another way lenders may protect themselves on these riskier loans is with larger down payment requirements. In many cases, lenders will require at least 20% down or more. This ensures you have some skin in the game and are more motivated to continue making payments.
FAQs
How is a portfolio loan different from a conventional loan?
With conventional loans, lenders must follow the guidelines and requirements set by Fannie Mae and Freddie Mac. With portfolio loans, they can set their own loan requirements, which may make it easier for some borrowers to qualify.
Who are portfolio loans good for?
Portfolio loans are good for non-traditional workers with strong financials — like self-employed borrowers, business owners, freelancers, or contractors. They can also be a good choice if you have a recent credit event or need a larger-sized loan, and you may also look at portfolio loans for investment properties or fixer-uppers.
Where can I find portfolio lenders?
Community banks, credit unions, and some specialized mortgage lenders offer portfolio loans. Make sure to get quotes from several portfolio loan lenders to get the best rate.
Are portfolio loans difficult to qualify for?
Portfolio loan requirements are usually less strict than they are on conventional or government-backed loans, but you may need a higher down payment than you would with other loan programs. Lenders set their own standards for these loans, so qualification requirements can vary.
Can I refinance into a portfolio loan?
Yes, you can refinance into a portfolio loan from another loan program. This may be a good idea if it helps you qualify for better terms or suits your financial goals.
What's the difference between a portfolio loan vs. conforming loan?
A conforming loan is a type of conventional loan that must follow the rules set out by Fannie Mae and Freddie Mac. A portfolio loan is one that the lender intends to keep on their balance sheet (not sell to Fannie or Freddie). This gives it more flexibility in setting the loan requirements.
Kate Underwood
Kate Underwood pivoted from a high-school language teaching career to become a personal finance writer. She now gets to spend her days providing actionable financial guidance and empowering others to rewrite their own financialstories. When not writing, she enjoys chasing after her two sons, spending time in nature, and planning her next trip. You can connect with her atwww.kateunderwoodwriter.com.
Aly J. Yale is a freelance writer, specializing in real estate, mortgage, and the housing market. Her work has been published in Forbes, Money Magazine, Bankrate, The Motley Fool, The Balance, Money Under 30, and more. Prior to freelancing, she served as an editor and reporter for The Dallas Morning News. She graduated from TCU's Bob Schieffer College of Communication with a focus on radio-TV-film and news-editorial journalism. Connect with her on TwitterorLinkedIn.
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