Portfolio Loans Explained – What Is a Portfolio Loan?
You may have heard of this term before but do you actually know what a portfolio loan is?
A portfolio loan is defined as a type of mortgage loan where the lender (usually a bank) keeps the loan in their investment portfolio instead of selling it in the secondary mortgage market.
In other words, the bank has an intention of holding onto the loan for its entire term – usually 15 to 30 years – and doesn’t plan on selling it to another investor. Mortgage portfolio loans are a great way for a borrower to get financing that they might not otherwise be able to obtain. For example, if you have less-than-perfect credit, a portfolio loan could be a good option.
This mortgage is not sold to or guaranteed by government-sponsored entities like Fannie Mae or Freddie Mac. They are usually held by the originating lender and not packaged and sold on the secondary market which is often the case with many other loans of this type. However, they are not as widely available as other ones, and entities that do offer them usually have stricter eligibility requirements and set higher interest rates than on conventional loans.
Despite some drawbacks, a real estate portfolio loan is a good option for anyone who is struggling to qualify for a traditional mortgage. In case you’re self-employed, don’t have the best DTI, or are otherwise considered a high-risk borrower, you may find it difficult to get approved for a conventional loan. In these cases, a portfolio loan could be your best shot at getting the house you want.
In case you are contemplating whether or not this loan fits your needs, be sure to read our article first to learn all the important ins and outs of this mortgage type. Keep in mind that a portfolio loan also comes with a set of pros and cons one must think about before making a final decision. Here, we will discuss not only that, but much more you need to take into account.
How Do Portfolio Loans Work?
As we already mentioned, a portfolio loan is a type of mortgage that is not securitized by Fannie Mae, Freddie Mac, or Ginnie Mae. In other words, it is a loan that does not conform to the guidelines set by these government-sponsored enterprises (GSEs). Portfolio loan lenders are the ones who originate them and do not sell in the secondary market.
These loans typically have higher interest rates than conforming loans and stricter eligibility requirements. Additionally, they offer less favorable terms and conditions. As a result, borrowers should be cautious about taking out this loan.
Who Can Qualify for a Portfolio Loan?
Now that you got familiar with what portfolio loans are, let’s take a look at who can qualify and how to do so.
Individuals who can qualify for a portfolio loan are typically high-net-worth individuals with a strong financial history. They are also very useful for borrowers who do not qualify for conforming loans. For example, these loans may be available to borrowers with higher debt-to-income ratios whose options are limited elsewhere. They may also be available for borrowers who are self-employed or who have other nontraditional sources of income.
Portfolio loans are used for a variety of purposes, including investment properties, second homes, and even primary residences. However, because they are not backed by any collateral, they can be difficult to obtain.
In case you do decide to take out this loan and purchase a home they can help you build equity in your house and eventually graduate to a more traditional mortgage product. All you have to do to achieve this is make your payments on time and keep up with your other financial obligations.
Advantages and Disadvantages of Portfolio Loans
These mortgages are held by the lenders instead of being sold on the secondary market. Due to this, they may offer some advantages when compared to other types. However, like any other loan, they also have some disadvantages you as a borrower need to think about.
On the plus side, these loans can often be custom tailored to the borrower’s needs. Because they are not sold on the secondary market, they often offer more flexible terms than traditional loans. For example, a portfolio loan may have a longer term, a higher loan-to-value ratio, or even lower interest rates.
On the other side, they may not be available for all loan purposes. Some lenders only offer portfolio loans for specific purposes, and that is most commonly for buying a house or other real estate property.
Advantages
- Lenders offering portfolio loans usually are more flexible for negotiation.
- Investors can use them to buy a property that doesn’t fit traditional lending criteria.
- Portfolio lenders may consider forms of income that can’t be used to qualify for conventional financing.
- Borrowers may negotiate more favorable terms with the lender, such as a lower interest rate or longer repayment period.
- This loan can sometimes be used to finance the purchase of multiple properties.
Disadvantages
There are several disadvantages to portfolio loans, which may or may not be a deal breaker for you.
- Portfolio loans usually have higher interest rates than traditional mortgages.
- They may have shorter terms than conventional mortgages, with large balloon payments due at the end of the loan term.
- Fees may be higher for conventional loans, including origination fees, points, and closing costs.
- Can be harder to qualify for. Portfolio loans typically have stricter credit requirements than other types of loans.
What Is a Portfolio Lender?
A portfolio lender is typically a financial institution that lends money to borrowers and then keeps the loan on its books instead of selling it in the secondary market. Portfolio loan lenders are typically banks, credit unions, and insurance companies.
The main advantage of getting a loan from a portfolio lender is that these types of lenders are usually more flexible when it comes to underwriting loans. That means they may be more willing to approve loans for borrowers with less-than-perfect credit or income.
Another benefit of working with a portfolio lender is that you may be able to negotiate a higher loan-to-value (LTV) ratio, which is the percentage of the home’s value that you can borrow. A higher LTV ratio means you can finance a larger portion of your home’s purchase price or refinance the amount.
However, there are some drawbacks to working with these lenders. For one, they typically charge higher interest rates because they don’t have the same economies of scale. Additionally, portfolio lenders usually require borrowers to have a larger down payment than what’s required by most banks (usually 20% or more).
If you’re considering getting a mortgage from a portfolio lender, make sure you compare offers from multiple lenders to ensure you’re getting the best deal possible. Portfolio loan interest rates most commonly range from 5% to about 9%.
What to Look for in a Portfolio Lender
If you’re considering taking out a portfolio loan, there are a few things you’ll want to keep in mind in order to make sure you’re getting the best possible deal. First and foremost, you’ll want to find a lender who has experience with this type of loan and who is willing to work with you to tailor the terms to your specific needs.
It’s also important to find a lender who offers competitive rates and fees. Be sure to compare multiple lenders before making a decision, and don’t be afraid to negotiate for better terms. Finally, make sure you understand all the terms and conditions of the loan before signing anything. Once you’ve found a good portfolio lender, you can rest assured that you’re on your way to getting the financing you need.
In case you want to find a lender, the best way to do so is by using a loan broker or marketplace that can match you with a portfolio lender that’s right for you.
Are Portfolio Loans a Good Idea?
Portfolio loans can be a good option for borrowers who cannot qualify for a conventional loan. In case you are self-employed, plan on buying an investment property or have a high debt-to-income ratio, traditional mortgage loan lenders may decline your application. These are all the cases where portfolio loans may be a lot better choice than any other loan type you can choose for this purpose.
Additionally, borrowers who have other income sources that cannot be verified by W-2s can all be eligible for these loans. Buying a home after a bankruptcy, short sale or foreclosure is especially hard if you need any long-term financing like a mortgage but all these individuals can be eligible for portfolio loans.
Any foreign nationals, individuals who have high net worth but low documentable income or just need second mortgages will likely be able to qualify for this financing as well.
Take your time to also look into portfolio loan requirements as they can vary quite a bit between the lenders. Typically, they include a credit score of 700 and a sizable down payment.
Final Thoughts
When it comes to portfolio loans, there are many things to consider. On the one hand, these loans can be a great way to secure financing for investment properties or buy a home. On the other hand, they can be more expensive than traditional loans.
Ultimately, whether or not a portfolio loan is right for you will depend on your specific situation and goals. However, if you’re not sure you can qualify for one or don’t want to pay the higher interest rates, then you may want to explore other options.
We recommend you use this guide to help you know how to qualify for a portfolio loan and if you need any additional help don’t hesitate and hire a financial advisor.
