Ready to buy a house? With rates near historic lows, this may be a great time to take the plunge.
What is a portfolio lender?
A portfolio lender is a bank or lending institution that originates mortgages and holds them in its own portfolio instead of selling them to the secondary market.
A portfolio lender uses its own money to grant loans and does not sell its loans to institutional investors. The two largest investors in mortgages, Fannie Mae and Freddie Mac, buy only loans that meet their strict underwriting standards because they want to minimize risk for their investors. Borrowers who don’t meet Fannie and Freddie guidelines may want to turn to a portfolio lender.
Portfolio lenders are likely to be smaller, community banks with more flexible lending standards than conventional banks. They invest in communities and relationships, so they can make decisions based on more than the answers on a borrower’s application. They can consider intangible factors, too, and may grant mortgages to people with blemished credit with whom they’ve had long-standing relationships.
But portfolio lenders do not offer all the loan programs that large commercial banks do. Some may not offer the 30-year fixed-rate mortgage but can grant a 15-year fixed-rate mortgage or an adjustable-rate mortgage. Also, a portfolio lender probably will require that the borrower have all his money and accounts with them.
Portfolio lender example
Jerry, who has operated a business for over 30 years in his small hometown, wants to buy a house but cannot get a mortgage at any of the major banks in his area because his debts eat up a bigger percentage of his income than the conventional banks allow. The traditional lenders all sell their mortgages on the secondary market, so they make sure that the mortgages they buy were granted under tight lending standards.
Jerry decides to go to a small, local bank known as a portfolio lender. The bankers there all know Jerry to be an honest, reliable business owner who has been in the community many years. So, although Jerry has less-than-perfect credit, the portfolio lender does not consider him a risky borrower and grants him a mortgage. The community bank has more flexible lending standards because it holds the mortgages it originates in its portfolio, rather than selling them.
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