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What Is a Portfolio Loan and How Does It Work?

The Short Version

  • A portfolio loan is a mortgage that a lender keeps in their portfolio instead of selling it to a third party
  • Portfolio loans can benefit borrowers because the lender can set the borrowing requirements instead of conforming to criteria set by Freddie Mac and Fannie Mae
  • Portfolio loans can be difficult to get because they are generally unadvertised. But the loan requirements could be easier or more stringent, as they are up to the lender

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If you’re a potential home buyer, chances are you’re interested in getting a mortgage. And chances are the mortgage you’ll get is a “conventional” mortgage – one that conforms to the standards set by Freddie Mac and Fannie Mae. 

But if you wouldn’t call your financial situation “conventional,” you might be looking for other mortgage options. A portfolio loan is one such option. 

A portfolio loan is a mortgage that a lender keeps in their portfolio instead of selling it to a third party. But what does that mean? And why might you want to get a portfolio loan? We’ll tell you all about portfolio loans and how they work. Then, you can decide whether a portfolio loan might be right for you and your home buying needs.

What Is a Portfolio Loan and How Does It Work?

A portfolio loan, also known as a portfolio mortgage, is a mortgage that the lender (like a bank, credit union or online lender) keeps in-house in its own loan portfolio. This means that the lender both originates and maintains the mortgage rather than selling it on the secondary market

Most mortgages sold are conventional (or conforming) mortgages. That is, they “conform” to the borrowing requirements set by Fannie Mae and Freddie Mac. But a lender won’t sell a portfolio loan, so the lender can set its own standards. This way, people who may not qualify for a conventional mortgage loan may be able to still get a mortgage.

Why are mortgages sold?

Most mortgage lenders can’t carry an unlimited amount of debt on their books and need capital they can then lend to other borrowers. To generate liquid capital and keep lending, a real estate lender will sell your mortgage on the secondary market.

So how do mortgages get sold? Usually, mortgages are bundled with other mortgages into a financial package called a mortgage-backed security. Federally backed companies Fannie Mae and Freddie Mac are two of the major investors that purchase mortgages. They do this to keep the money flowing in the mortgage industry so more people will be able to finance and own homes.

Will selling a mortgage affect the borrower?

Selling a mortgage doesn’t affect the terms of the loan for the borrower. The only thing that sometimes changes is that the borrower may need to send their monthly mortgage payment to a different mortgage servicer.

Borrowers Who Can Benefit from Portfolio Loans

Portfolio loans can benefit borrowers because the lender can set the borrowing requirements instead of conforming to criteria set by Freddie Mac and Fannie Mae. Several scenarios where a borrower could benefit from a portfolio loan over a conventional mortgage include:

  • Borrowers with a bad credit score or high DTI: Applicable after a period of unemployment or another situation that temporarily derailed their finances, resulting in numbers that don’t meet conventional mortgage requirements
  • High earners with low credit scores: For borrowers who may have a high-paying job, but have issues making monthly payments on time.
  • Self-employed or freelance borrowers: A borrower may have a sufficient credit score and assets, but might lack steady income. A portfolio loan could be an option, or the borrower could consider a bank statement mortgage.
  • Good customers of the lender: Sometimes, a lender will only offer a portfolio loan to their best, most reliable borrowers, or to someone they want to have a better relationship with, like a local business owner.
  • Buyers who need a larger loan: If a borrower needs a larger loan amount than they qualify for or needs a mortgage larger than a jumbo loan, a portfolio loan could be an option.

Advantages of Portfolio Loans 

Portfolio loans have some distinct advantages. Some of the pros of portfolio mortgage loans might include:

  • Approval rates: A portfolio lender may be more lenient in approving mortgages. For instance, the borrower may not have to meet standards for a minimum down payment, carry primary mortgage insurance (PMI) for a smaller down payment, loan limits or a minimum credit score.
  • Flexible terms: The lender can tailor the loan to the borrower’s needs with custom terms like bimonthly payments or a balloon payment. The lender might also allow a borrower to finance more properties than would be allowed with a conventional mortgage.

Disadvantages of Portfolio Loans

Some of the possible cons of portfolio mortgage loans include:

  • Higher interest rate: Mortgage rates tend to be higher for portfolio loans to compensate for the risk the lender has to shoulder by having the loan on their books.
     
  • Fees: The lender might not be making as much money with the portfolio loan as they would with conventional loan. So, the portfolio lender may charge higher fees, like a higher prepayment fee, to make up some of the difference.

How To Get a Portfolio Loan

Portfolio loans can be difficult to get because they are generally unadvertised. And the loan requirements could be easier or more stringent, as they are up to the lender. How, then, is a borrower supposed to get a portfolio loan? Here are some tips on finding a portfolio lender:

  • Build rapport with your financial institution: The better customer you are and the more personal your relationship with your lender, the more likely that you can ask for and receive a portfolio loan. This may be easiest to accomplish with a local lender.
  • Compare rates, fees and terms: Be sure to shop around for the best interest rate and terms on a portfolio mortgage loan just as you would for any real estate loan.
  • Seek advice from an experienced professional: Ask a financial advisor for recommendations about how and where to find portfolio loans.

Is a Portfolio Loan Right for You?

With a little bit of legwork, you may be able to secure a portfolio mortgage loan. Be sure to work with trusted, reputable lenders and keep on top of your finances to make them as strong as possible.

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What kind of property do you want to purchase? What kind of property do you own?
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When are you planning to buy? It’s okay if you haven’t found a property yet!
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Do you have a second mortgage?
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Determining Your Credit Score
  1. Your credit score is a three-digit number that’s used to predict how likely it is you’ll pay back money you borrowed.
  2. The score generally ranges from 300 (low) to 850 (excellent). It’s calculated by looking at your previous credit history.
  3. You can check your credit report to find the number or use a free credit tool. You can also plug in your best guess.

Tell us a bit more about you

Enter your contact info so we can get in touch

By submitting your contact information you agree to our Terms of Use and our Security and Privacy Policy. You also expressly consent to having Rocket Mortgage, our Family of Companies, and potentially our mortgage partners contact you about your inquiry by text message or phone (including automatic telephone dialing system or an artificial or prerecorded voice) to the residential or cellular telephone number you have provided, even if that telephone number is on a corporate, state, or national Do Not Call Registry. You do not have to agree to receive such calls or messages as a condition of getting any services from Rocket Mortgage or its affiliates. By communicating with us by phone, you consent to calls being recorded and monitored.

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