A portfolio loan is a kind of mortgage that a lender originates and retains instead of offloading on the secondary mortgage market. Because a portfolio loan is kept in the lender’s portfolio, or “on the books,” the lender sets the standards — and sometimes favorably for borrowers.
How portfolio loans work
Portfolio loan standards can differ from Fannie Mae, Freddie Mac and government-insured loan requirements, which could help borrowers having difficulty getting approved for other more common types of loans. The benefits may include:
- The size of the loan doesn’t have to meet conforming loan limits.
- The lender can set any down payment requirement.
- Private mortgage insurance (PMI) may not be required, even if you’re making a small down payment.
A portfolio loan can be attractive to borrowers in some situations.
- Let’s say that a period of bad luck pushed down your credit score — maybe you’ve had a few months of low income or unemployment, or both. Financial hits like that don’t look good on paper, so you may not be able to get a typical mortgage. If you have a history of solid credit and consistent income otherwise, however, your bank may agree to offer you portfolio financing for a home, and with more flexible underwriting.
- If you own a local business (maybe you’re a doctor or lawyer), a bank may also offer you a special deal in the form of a portfolio loan. Why? If you’re a business owner, banks want the accounts tied to your business, and to foster a relationship with you. For the bank, a portfolio loan is a way to generate more business, so they may offer you a mortgage for your home with an attractive interest rate, little down or jumbo financing.
Portfolio loans are rare, however. Typically, a lender originates a loan and sells it on the secondary market to raise new capital to continue to create new loans. With a portfolio loan, there’s no sale, so the lender has 100-percent liability if the borrower defaults. Plus, it’s not getting fresh cash to originate more loans.
Because of this, portfolio loans generally go to the lender’s best customers — the ones most likely to generate lots of future business.
Still, whoever the borrower is, a lender can’t simply hand out checks. The loan must meet their internal requirements, such as verification that the borrower has the ability to repay the debt and doesn’t represent excess risk.
Why a portfolio loan isn’t for everyone
A portfolio loan can be a smart move — it may offer more liberal underwriting standards, require a lower credit score and a smaller down payment and allow you to borrow more than you could with another type of mortgage. In some cases, though, you may not want one. Here’s why.
- There’s a chance of a higher interest rate. A portfolio loan may be available at a lower interest rate, but that’s not always the case. Remember that with a portfolio loan, the lender is losing the chance to resell the debt into the secondary market. That’s an opportunity cost, and the lender may well want a higher interest rate to make up for it. The lender may also charge a higher interest rate in exchange for more flexible underwriting and more risk.
- There could be costly fees. A lender could charge higher fees on a portfolio loan because they’re losing money elsewhere. In today’s low-rate environment, for example, bank revenues are down substantially. One way to compensate is to make portfolio loans to marginal borrowers with higher fees.
- They’re not always flexible. A portfolio loan is designed to be held by the lender until the property is refinanced or sold, but sometimes, a lender will want the option to sell the loan in the future. In that case, it might create a portfolio loan within Fannie Mae or Freddie Mac standards, so a borrower will have to meet many of the usual underwriting requirements. In this case, there’s little advantage to a borrower with poor credit, or one who needs a jumbo loan.
How to get a portfolio loan
Portfolio loans generally aren’t advertised — they’re really a device or perk that lenders use to get more business and reward good customers. Even so, you should shop around and ask your bank and other local lenders if they can offer you portfolio financing.
One of the best ways to increase your chances is to make a point of using your local bank for your checking, savings, retirement and business accounts. Get to know your local loan officers and branch managers and develop a relationship. You might then find that when you have a financial need, such as portfolio financing, your bank will be happy to help.