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Key takeaways

  • Most mortgages are sold to investors on the secondary mortgage market, meeting conforming loan criteria around factors like credit score, loan size and loan-to-value (LTV) ratio. Portfolio mortgage lenders don’t sell their mortgages this way — instead, they hold on to the loans and often service them.
  • Because portfolio lenders don’t sell their mortgages, these loans can have more flexible qualifying criteria. This can help borrowers with unique credit or financial circumstances get a mortgage.
  • A portfolio lender is harder to find than a traditional mortgage lender. You might need to work with a broker to find options.

Portfolio lenders provide mortgages to borrowers the same way other lenders do, but rather than selling the loans to Fannie Mae and Freddie Mac, they keep the loans on their books and often service them. In 2022, 23.7 percent of mortgages originated from a portfolio lender, according to the Urban Institute.

You might consider a portfolio mortgage lender if you have bad credit or debt that makes it harder for you to get approved for a loan based on Fannie and Freddie standards.

What is a portfolio lender?

A portfolio lender offers mortgages to borrowers but does not sell those mortgages to Fannie Mae, Freddie Mac or other agencies. This means the loans don’t have to meet Fannie and Freddie’s conforming loan standards, which includes the borrower having a minimum 620 credit score and other factors.

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

“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.

However, portfolio loans carry more risk for lenders because they can’t sell them. To compensate, these lenders often charge higher interest rates.

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.
  • Less servicer uncertainty: Many portfolio lenders choose to own and 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.

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, they accept higher risk and might charge higher rates and fees.
  • Prepayment penalties: Portfolio loans may charge a prepayment penalty, a fee charged if you pay your loan ahead of schedule. You might owe this fee if you choose to make additional payments or pay off the loan ahead of the scheduled repayment term.

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’re more likely to get a portfolio loan if you’ve been a long-time bank or mortgage customer. A portfolio lender might be willing to take a chance with you, but in exchange for the additional risk, it might also want a higher rate or bigger upfront fees. Still, that may be a better option than no loan at all.

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.

Portfolio lender FAQ

  • 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.
  • 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.
  • Portfolio loans might offer more down payment flexibility to meet borrowers’ needs. However, the lender will still establish a down payment requirement.
  • 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.