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With most mortgages, the lender that originates the loan doesn’t actually hold onto it. Instead, the loan gets bought and sold on the secondary mortgage market, which helps free up capital so more borrowers can get loans. There are, however, some exceptions that don’t wind up being bought and sold. These are called portfolio loans.
What is a portfolio loan?
A portfolio loan is a kind of mortgage that a lender originates and retains instead of offloading on the secondary mortgage market. A portfolio loan stays in the lender’s portfolio, or “on the books,” never entering that web of behind-the-scenes buying and selling.
Why does that matter? With a portfolio loan, the lender gets to set the standards — what kind of credit score they’ll approve and how much money they’ll offer to the borrower, for example — instead of adhering to the standards put in place by Freddie Mac and Fannie Mae.
How portfolio loans work
A portfolio loan has plenty in common with non-portfolio mortgages: You’re still going to apply to borrow a chunk of money, and a lender will assign a level of risk to you as a customer based on the likelihood that you’ll pay it back.
However, portfolio standards often differ from Fannie Mae, Freddie Mac and government-insured loan requirements. Those options tend to have rigid requirements around credit scores, down payment contributions and debt-to-income (DTI) ratios.
A portfolio might offer more flexible 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.
For the lender, a portfolio loan comes with one key difference: 100 percent liability if the borrower defaults. Because they are riskier propositions, portfolio loans might come with higher interest rates and higher origination fees.
Who is a portfolio loan best for?
Portfolio loans allow borrowers who don’t meet Fannie and Freddie’s conforming loan requirements the ability to still qualify for a loan. This borrower might be someone who isn’t employed but has significant assets, a real estate investor or a self-employed worker, for example. Some bank lenders offer portfolio loans to business customers, as well.
Pros and cons of portfolio loans
- Bigger loan options: Borrowers who need a bigger loan but don’t necessarily qualify for a jumbo loan might find more flexibility with a portfolio option.
- Flexible underwriting requirements: Borrowers who don’t have a stable income might find they can 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.
- Potential for a much higher interest rate: 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 might charge you a higher interest rate to make up for it. The lender might also charge a higher interest rate in exchange for more flexible underwriting and more 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.
How to get a portfolio loan
Portfolio loans aren’t advertised outright; you won’t find a lender simply by comparing mortgage rates. You might need to work with a mortgage broker who can match your specific needs with a lender that offers portfolio loans.
You could also try your local community bank. Bear in mind, though, that these types of loans are usually reserved for existing customers with substantial assets.