Guide to portfolio loans: Definition, how they work, requirements
Key takeaways
- A portfolio loan is a type of mortgage that a bank or lender creates and retains — keeps in its portfolio — rather than selling in the secondary mortgage market.
- Portfolio loans sometimes have more flexible credit and financial requirements compared to conforming mortgages, but also tend to come with higher interest rates and upfront costs.
- Portfolio loans aren’t available everywhere, and they’re typically for borrowers with unique financial circumstances.
What is a portfolio loan?
A portfolio loan is a type of mortgage created by a bank or lender, then retained in the bank or lender’s portfolio instead of sold, as most mortgages in the U.S. are. That gives the bank or lender the freedom to set its own loan terms, such as the interest rate and minimum credit score requirement.
These terms might be more flexible than the terms on a regular mortgage. This makes a portfolio loan an option for borrowers who don’t meet the eligibility criteria for a traditional loan.
However, portfolio loans aren’t as widely available as regular mortgages. Some lenders who offer them don’t even advertise them.
How a portfolio loan works
With most mortgages, the lender who creates the loan doesn’t keep it as part of its holdings. Instead, the lender sells the mortgage within the secondary mortgage market — a process that helps generate more money to make more mortgages. This is primarily facilitated by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy and back most mortgages in the U.S.
To be eligible for sale, however, a mortgage has to meet certain “conforming” standards, such as a minimum credit score and maximum debt ratios. Because lenders don’t sell portfolio loans, these standards don’t apply to them. With a portfolio loan, you might be able to borrow more or obtain the loan faster, for example, compared to a conforming mortgage.
The conforming standards exist for a reason, though: They help protect borrowers and lenders against the risk a borrower doesn’t repay the mortgage. A portfolio loan doesn’t have to adhere to these standards, so there’s greater risk. With that comes the potential for higher interest rates and fees.
Portfolio loan requirements
The requirements for a portfolio loan vary widely because the lender can set its own loan terms. For example, California-based Self-Help Federal Credit Union accepts credit scores as low as 580, but Atlantic Union Bank in Virginia requires at least a 640, and a minimum of 700 if you don’t have a down payment.
Portfolio loan pros and cons
Pros
- Bigger loan options: Borrowers who need an outsized mortgage or can’t make a larger down payment might find more flexibility with a portfolio option.
- Flexible underwriting: Borrowers who don’t have a stable earned income, holes in their credit histories or scores that don’t fit other standard criteria might qualify for a portfolio loan.
- More hands-on or personalized service: Many portfolio lenders are community banks with a connection to the area. That can mean better customer service or more willingness to find creative solutions.
Cons
- Potential for a much higher interest rate: Remember that with a portfolio loan, the lender is losing the chance to resell the debt in the secondary market. That’s an opportunity cost, and the lender could charge you a higher interest rate to make up for it.
- Higher fees: The lender might also charge more or more onerous fees in exchange for the additional risk.
- Still some standards to meet: Sometimes, lenders still want the option to sell the portfolio loan down the line. In that case, you might have to meet many of the usual underwriting requirements imposed by Fannie and Freddie.
What borrowers should know about portfolio loans today
If you have good credit and a steady income, you’re likely a better candidate for a conforming loan than a portfolio loan. Still, a portfolio loan could make sense in these cases:
- You have significant assets, but less stable income: Maybe you own a large chunk of valuable stocks, but you don’t want to sell them. A portfolio loan might let you borrow against their value.
- You’re a small business owner or self-employed: If your income isn’t documented in a traditional W-2 or you have extensive business records you plan to include in your mortgage application, the underwriting process for a portfolio loan might be a bit more manageable and tilt in your favor more easily.
- You’ve encountered some major financial hurdles in the past: If your credit score really needs work or you went through a bankruptcy, for example, it might be easier to get approved for a portfolio loan despite these marks on your credit history.
How to get a portfolio loan
Banks and other types of lenders don’t always promote portfolio loans in the same way they do regular mortgages. 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, too, that the bank might require you to maintain accounts with minimum balances in order to qualify.
Note: Some predatory lenders tout portfolio loans. Make sure any institution you deal with is an FDIC member or listed with the Nationwide Mortgage Licensing System and Registry (NMLS):
In addition, it’s wise to have a real estate attorney review the lender’s documents for any unusual features, charges or conditions.
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