Portfolio mortgage lenders: What are they and how do you find one?

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Most lenders don’t keep the mortgages they so graciously offered eager homebuyers (like you). Instead, once the loan closes, it often gets sold on the secondary mortgage market — to investors or entities like Fannie Mae and Freddie Mac. The lender pockets the cash, and lives to loan another day.

That’s how it often happens — but not always. Some lenders, known as portfolio lenders, don’t sell the mortgages but rather keep them on their books and often service them. In the home financing field, such loans are a small but mighty minority: As of the final quarter of 2023, more than one quarter of all mortgages (26.1 percent) originated from a portfolio lender, according to the Urban Institute.

Portfolio mortgage lenders work with borrowers the way any lender does. And you might consider going with one, if you have bad credit or other financial circumstances that make it harder for you to get approved by a more traditional lender.

Here’s how portfolio lenders work, and how to find one.

What is a portfolio lender?

Though selling loans on the secondary mortgage market is common, there’s no rule that lenders must do so. Instead, lenders with lots of cash, typically banks, can originate mortgages and simply hold onto them. Such loans are called portfolio loans because they’re kept as part of the lender’s portfolio of assets.

Because the lender does not sell its mortgages to Fannie Mae and Freddie Mac or other investors, it has certain freedoms in designing the loans. For one thing, the loans don’t have to meet the Federal Housing Finance Agency (FHFA)’s conforming loan standards, which includes the borrower having a minimum 620 credit score, a ceiling for the loan size, and other features. (Fannie and Freddie will only buy mortgages that meet, or conform to, the FHFA standards.)

Aside from the conforming loan standards, portfolio mortgages differ from conventional mortgages in other various ways, including:

• faster funding times
• more flexible repayment arrangements
• potentially bigger loan amounts

These loans are typically offered by banks but may also be offered by mortgage companies and other non-banking institutions.

“Portfolio lenders can be an attractive option for a borrower looking for mortgage options more suited to their specific situation, such as a small business owner,” says Greg McBride, CFA, chief financial analyst for Bankrate. “More flexible underwriting and unique loan structures make these lenders appealing.”

How do loans from portfolio lenders work?

When a loan is held in a portfolio, it means the lender can establish its own approval standards instead of adhering to the requirements for selling loans on the secondary market. Because of this, portfolio lenders can offer more flexible terms, including larger loan amounts, smaller initial payments and other options that fit a borrower’s situation. When underwriting, they are also more accepting of non-W-2 or irregular income, and more forgiving of credit history blots, like bankruptcy.

However, portfolio loans carry more risk for lenders because they can’t sell them. To compensate, these lenders often charge higher interest rates than they would on conforming loans or bigger fees, or impose other terms that the FHFA or the Consumer Finance Protection Bureau don’t allow. These mortgages are a type of non-qualifying loan (non-QM loan for short).

How does a portfolio lender generate fees and profits?

Since a portfolio mortgage lender keeps the loan, it can’t make money by selling it — a big profit source for traditional lenders. That means they must generate their gains in other ways.

Origination and other administrative fees are one way; discount points are another. Traditional lenders impose these too, of course, but they’re limited as to the amount or percentage they can charge. Portfolio lenders aren’t, so their fees can be higher. They can also charge more in interest.

Portfolio lenders may also make money through what’s known as the net interest rate spread, which is the difference between any interest they earn on their mortgages and the interest they pay out on deposit accounts or longer-term deposits.

Pros of portfolio lenders

Portfolio lenders can appeal to borrowers for the following reasons:

• Flexible terms: Because portfolio loans don’t have to conform to the standards for sale on the secondary market, portfolio lenders can be more flexible, such as offering unusual repayment terms, larger loans, smaller down payments and other customizations to meet their borrowers’ needs.
• Easier criteria: When underwriting, a portfolio lender often considers evidence of income or assets beyond your basic wages. It might be more forgiving of bankruptcies or other blots on your credit history.
• Less servicer uncertainty: Many portfolio lenders choose to service the loans they originate. Having a lender sell your loan to a new servicer can be a hassle, so not having to deal with this happening, potentially multiple times, can save you some annoyance.
• If you are having any kind of repayment issue, it will most likely be easier to find someone to talk to in authority.

Cons of portfolio lenders

Portfolio lenders aren’t perfect for every situation. Some cons include:

• Higher costs: One benefit of the conforming mortgage requirements is that lenders take on less risk and can sell their loans to further reduce that risk. Because portfolio lenders hold their loans through maturity, and can’t unload them, they accept higher risk and might charge higher rates and fees.
• Prepayment penalties: Portfolio lenders may charge a prepayment penalty, a fee incurred if you pay off your loan ahead of schedule. You might owe this fee if you choose to make additional payments.
• Harder to find: Portfolio loans are not standard, and many lenders don’t offer them. You might have to go through a mortgage broker to get one.

How to find a portfolio mortgage lender

Unlike many mortgage products, portfolio loans are not especially promoted, or in many cases, promoted at all. A mortgage broker can assist you in finding a lender that specializes in portfolio loans, or at least with finding a loan that fits your credit and financial profile.

You can also ask your own bank: Some will do it as a special accommodation, though you’re more likely to get a portfolio loan if you’ve been a long-time customer. Keep in mind that a new bank portfolio lender may require you to move your accounts to them and maintain minimum compensating balances.

As always with mortgage financing, not all loans work for all borrowers. If a loan has a low interest rate but requires big fees upfront, it might not be a good deal in the long run, so always compare the APR, which includes these costs, on different mortgages — not just the basic interest rate.

Portfolio lender FAQ

• Who might benefit from a portfolio loan?

  Portfolio loans are an alternative for borrowers who don’t meet the requirements for a conforming loan. This might include individuals who are unemployed but have significant assets, real estate investors and self-employed individuals with fluctuating income. Portfolio loans can be an option for borrowers with a poor credit history or high DTI ratio, as well.
  

• What are the typical interest rates for portfolio mortgage loans?

  As with any home loan, mortgage rates vary from lender to lender. Many portfolio loans come with higher interest rates than conforming loans because the lender is taking on more risk.
  

• How much do portfolio lenders require for a down payment?

  Portfolio lenders might be more flexible when it comes to income, but less so when it comes to down payments. Often they require at least 20 percent and sometimes even 30 percent. Certainly, don’t expect to find 3.5 percent deals, like those offered on FHA loans.
  

• Is it hard to get a portfolio loan?

  In some cases, portfolio lenders are easier to get approved with than conforming loan lenders. The portfolio lender has the freedom to deviate from the usual eligibility criteria when making a portfolio loan.
  

Additional reporting by Mia Taylor