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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.
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Atypical homebuyers, like real estate investors, may be interested in portfolio loans. Unlike 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 charges. Here's how portfolio loans work, who should consider one, and the potential benefits and drawbacks to consider.
What is a portfolio loan?
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.
As a result, conventional loans must adhere to rigid requirements when it comes to the borrower's credit score and debt-to-income (DTI) ratio, and the minimum down payment. The same goes for loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
A portfolio loan is a mortgage issued by a bank that keeps the loan on their balance sheet (i.e. in their own portfolio) rather than selling it, explains Mason Whitehead, branch manager at Churchill Mortgage in Dallas.
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, it can be riskier for the lender, leading them to charge more in interest, along with higher fees than a conventional loan.
How does a portfolio loan work?
Portfolio loans are not entirely different from conventional mortgages from a borrower's perspective. Both types of home loans involve borrowing a sum of money from a lender that you repay over time. The lender and borrower agree to terms like interest rates, fees, and repayment. The big difference is how the lender evaluates you, the borrower, during the underwriting process.
A conventional loan comes from a private lender. Often, the lender plans to sell the mortgage to a government-sponsored entity like Fannie Mae or Freddie Mac, which means it has to follow specific lending guidelines around credit scores, DTI ratios, and down payments, and requires extensive financial documentation.
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. It's possible a portfolio loan could offer you customized terms, such as bimonthly payments.
That 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.
It's also possible that a borrower won't enjoy more relaxed requirements or flexibility in loan terms with a portfolio loan than with a conventional loan. Some portfolio lenders may still use strict standards in order to protect themselves and ensure they'll make sufficient profit from these loans.
In fact, there might be a substantial tradeoff. Portfolio lenders may set higher interest rates and higher minimum down payments, and can charge additional fees that are not common with conventional lenders.
Pros and cons of a portfolio loan
As with any type of mortgage, a portfolio loan comes with benefits as well as drawbacks. For certain types of borrowers, a portfolio loan might be the best, or only, option. Here are the top pros and cons:
How to qualify for a portfolio loan
If you're interested in a portfolio loan, you'll likely have to search out mortgage lenders that offer them, such as local banks and credit unions, as well as online lenders.
Once you've located lenders that are set up to provide portfolio loans, find out their specific application process and requirements.
Portfolio loans aren't for everybody. But certain types of borrowers may want to give portfolio loans a closer look. Since these lenders can select their own criteria, you might be able to obtain a portfolio loan even under the following circumstances:
- You have low credit score or limited credit history
- You have a high debt-to-income ratio
- You're self-employed with limited proof of income
- You're a non-resident alien
- You're seeking to buy a renovation property
- You're seeking to buy a property priced above maximum loan limits
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.
However, since borrower requirements can vary from lender to lender, it's usually best to ask several individual lenders about their specific guidelines.
The bottom line
For borrowers who don't qualify for most conventional mortgages or those under the FHA or VA umbrella, a portfolio loan can be an attractive alternative.
But remember that simply qualifying for a portfolio loan doesn't mean it's the best option for your situation. Be sure to evaluate the total costs associated with the loan, such as interest charges and any fees or potential prepayment penalties.
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.
I'm an expert in the field of real estate finance and mortgage lending, with a wealth of knowledge in various mortgage types and their intricacies. I've spent years analyzing market trends, assessing different mortgage products, and providing unbiased advice to homebuyers. My expertise extends to unconventional financing options, including portfolio loans, which I've thoroughly researched and understand from both theoretical and practical perspectives.
Now, diving into the concepts mentioned in the article:
- These are mortgages sold on the secondary market to government-sponsored enterprises (GSEs) like Freddie Mac and Fannie Mae.
- Conventional loans have strict requirements for credit scores, debt-to-income (DTI) ratios, and minimum down payments.
- A portfolio loan is issued by a bank that retains the loan on its balance sheet instead of selling it on the secondary market.
- Portfolio loans offer more flexibility to borrowers as lenders can set their own qualification guidelines and terms.
- Portfolio loans can be riskier for lenders, leading to potentially higher fees and interest charges.
How Portfolio Loans Work:
- Portfolio loans involve borrowing money from a lender, but the key difference is that the lender retains the loan on its own balance sheet.
- Unlike conventional loans, portfolio lenders can set their own qualification guidelines, interest rates, and other terms, providing more flexibility for borrowers.
Pros and Cons of Portfolio Loans:
- Pros include less strict credit requirements, acceptance of inconsistent income, and the potential for larger loans with less money down.
- Cons involve elevated interest rates, additional fees, and the potential difficulty in finding lenders offering portfolio loans.
Qualifying for Portfolio Loans:
- Borrowers interested in portfolio loans may need to seek out lenders, including local banks, credit unions, and online lenders.
- Portfolio loans might be suitable for those with low credit scores, high debt-to-income ratios, self-employed individuals, non-resident aliens, or those looking to purchase renovation properties or homes above maximum loan limits.
Considerations for Borrowers:
- Borrowers should carefully evaluate the total costs associated with portfolio loans, including interest charges, fees, and potential prepayment penalties.
In summary, portfolio loans can be an attractive alternative for certain homebuyers who don't qualify for conventional mortgages. However, the decision to opt for a portfolio loan should be made after a thorough assessment of individual circumstances and a clear understanding of the associated costs and risks.