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.
Portfolio lenders have been in the news lately for something they won’t be doing. Starting December 1, a new government mortgage refinance fee is set to begin. The so-called Adverse Market Fee is a .5 percent levy that will apply to all refinances for $125,000 or more that are sold to the two agencies above.
Since portfolio loans will not include this new fee, that might mean savings for consumers who seek out these lenders. However, the fee is paid by lenders to the agencies when they sell the loans, so it is being baked into the rate quotes to refinance mortgages. Some portfolio lenders may choose to increase their profit margin, or they may pass the savings along to borrowers.
“With a typical difference of 1/8 of a percentage point due to the new Adverse Market Fee, borrowers should still focus their search on finding the best terms. Seeking out a portfolio lender won’t guarantee you better terms than a lender that sells to Fannie Mae or Freddie Mac,” says Greg McBride, Bankrate’s chief financial analyst.
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.
In addition, underwriting requirements are stricter these days. The reason is that the COVID-19 pandemic has resulted in millions of lost jobs. Lenders are reviewing loan applications with extreme care in an effort to reduce risk of delinquencies and foreclosures.
Consider credit scores. According to Ellie Mae, the average FICO score on all closed loans increased to 752 in August from 750 in July. LTV decreased to 74 and DTI was 23/35. In April 2019 the average credit score was just 728.
Lenders are demanding higher credit scores and smaller monthly debt payments at the very time when mortgage rates are at or near historic lows. This is where portfolio loans come in for those who don’t meet the standard requirements.
Portfolio loans and lenders
While most mortgages are sold after closing in the secondary market and must meet the standards, 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 portfolio it means the lender can establish its own approval standards. It 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.
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.
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.