Portfolio lenders make loans in the usual way to consumers, but rather than sell the mortgages to agencies like Fannie Mae and Freddie Mac, they keep the loans on their books and often service them as well. Some 30 percent of all mortgages are typically underwritten through portfolio lenders, according to the Mortgage Bankers Association.

There are several good reasons to consider a portfolio mortgage lender, especially if you have credit or debt issues that might make mortgage approvals hard to get because of the stringent requirements for borrowers set by Fannie and Freddie, known as conforming mortgages.

What is a portfolio lender?

A portfolio lender is a lender that offers mortgages to consumers, but that does not sell those mortgages to Fannie Mae, Freddie Mac, or other agencies.

In the United States, most mortgages are sold after closing in the secondary market. To be sold on that secondary market, they must meet specific standards.

Though selling loans is common, there’s no rule that loans must be sold by lenders. 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.

When a loan is held in a portfolio it means the lender can establish its own approval standards instead of conforming to the requirements for selling loans on the secondary market. Instead, the lender can simply adopt conforming loan standards or it might have its own requirements. The lender might, for example, be willing to accept loan applications with lower credit scores or bigger monthly debt payments.

Fannie Mae, Freddie Mac and conforming mortgages

Fannie Mae and Freddie Mac buy loans from lenders but not all mortgages. They only purchase conforming mortgages, loans that meet their standards. Those standards include such things as a maximum loan size, debt-to-income ratio (DTI) and loan-to-value ratio (LTV) for borrowers.

Many other mortgage buyers also use the conforming loan standards, so if you’re a borrower and cannot meet these requirements the odds are that you will have a difficult time getting a mortgage from lenders that adhere to these standards.

With rising interest rates, monthly payments are growing more expensive, which can make it difficult for borrowers to meet debt-to-income requirements. Through Q1 of 2022, total household debt rose by 1.7 percent since Q4 2021 and average mortgage payments skyrocketed by 36 percent between March 2021 and March 2022.

That can make a portfolio loan, which may have less strict requirements for debt-to-income, appealing.

Pros of portfolio lenders

Portfolio lenders can be appealing to borrowers for a few reasons.

Easier underwriting

The primary draw of portfolio lenders is that they aren’t beholden to the requirements of conventional mortgages. You might be able to qualify for a loan with a portfolio lender even if you don’t meet typical requirements.

Flexible terms

Because loans don’t have to conform to typical standards for sale on the secondary market, lenders are free to be flexible, 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.

Higher costs

One benefit of the standard requirements for loans is that lenders take on less risk and can sell their loans to reduce risk further. Because portfolio lenders hold their loans through maturity, they accept higher risk and may charge higher rates and fees.

Prepayment penalties

Prepayment penalties, a fee charged if you pay your loan off ahead of schedule, are common with portfolio loans. You’ll owe this fee if you move before paying off your loan within a stated period or possibly if you choose to make additional payments.

How to find a portfolio mortgage lender

Unlike many mortgage products, portfolio loans are not especially promoted or in many cases promoted at all. Keep in mind:

  • You’re more likely to get a portfolio loan if you’ve been a long-time bank or mortgage customer or the lender wants your business.
  • A portfolio lender may be willing to take a chance with you but in exchange for the additional risk it may also want a higher rate or bigger up-front fees. Still, that may be a better opportunity than no new loan at all.
  • This may be an especially good time to ask about portfolio financing. The reason? Banks are holding huge amounts of cash. In both the first and second quarters bank deposits increased by more than $1 trillion.

As always with mortgage financing, not all loans work for all borrowers. If a loan has a low interest rate but requires big fees up front it may not be a good deal, so always compare the APR, which includes these costs. If you expect to move in the next few years, refinancing may not be a good financial option if you cannot recover your costs in that time. Always run the numbers.

To find a portfolio loan you’ve got to shop around. Ask lenders, title companies and real estate agents about portfolio financing. Keep in mind that sometimes portfolio lenders call themselves direct lenders. There’s hybrid lenders too, selling some loans to Fannie and Freddie and keeping other loans on their own books.

Bottom line

Look for financing that nets you a lower monthly cost, where loan fees and charges can be recaptured with monthly savings in the shortest possible time. If you’ve got irregular income or fall outside the conforming mortgage requirements, you’ll save time by beginning your search with portfolio lenders. Mortgage brokers can be especially helpful in putting you in touch with lenders that make these loans.