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Many portfolio lenders have relaxed credit and income requirements, making them more appealing to self-employed borrowers or real estate investors.
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If you don’t qualify for a conventional or government-backed mortgage, a portfolio loan may be an option.
Portfolio loans may have more lenient standards for credit scores, DTI ratios, or maximum borrowing amounts.
However, portfolio lenders can charge more because they take on greater risk than traditional lenders.
Atypical homebuyers, like real estate investors, may be interested in portfolio loans. Unlike conventional mortgages that are resold on the secondary market, lenders originate and retain portfolio loans themselves, which affects the process for borrowers.
Portfolio loans may be more flexible thanks to lower underwriting standards. However, they also can come with higher fees and interest charges. Here’s how portfolio loans work, who should consider one, and the potential benefits and drawbacks to consider.
What is a portfolio loan?
Many mortgages are sold on the secondary market to government-sponsored enterprises (GSEs) including Freddie Mac and Fannie Mae. They buy conventional mortgages from lenders to create more liquidity, stability, and affordability in the housing market.
As a result, conventional loans must adhere to rigid requirements when it comes to the borrower’s credit score and debt-to-income (DTI) ratio, and the minimum down payment. The same goes for loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).
A portfolio loan is a mortgage issued by a bank that keeps the loan on their balance sheet (i.e. in their own portfolio) rather than selling it, explains Mason Whitehead, branch manager at Churchill Mortgage in Dallas.
When issuing a portfolio loan, a lender doesn’t necessarily have to follow the same eligibility requirements as it does when issuing a conventional loan, which can offer more flexibility to borrowers.
At the same time, it can be riskier for the lender, leading them to charge more in interest, along with higher fees than a conventional loan.
How does a portfolio loan work?
Portfolio loans are not entirely different from conventional mortgages from a borrower’s perspective. Both types of home loans involve borrowing a sum of money from a lender that you repay over time. The lender and borrower agree to terms like interest rates, fees, and repayment. The big difference is how the lender evaluates you, the borrower, during the underwriting process.
A conventional loan comes from a private lender. Often, the lender plans to sell the mortgage to a government-sponsored entity like Fannie Mae or Freddie Mac, which means it has to follow specific lending guidelines around credit scores, DTI ratios, and down payments, and requires extensive financial documentation.
A portfolio lender doesn’t have to follow those guidelines because the loan stays on its own balance sheet. Lenders can set their own qualification guidelines and the minimum or maximum amount you can borrow, the interest rate it charges, and more. It’s possible a portfolio loan could offer you customized terms, such as bimonthly payments.
That makes portfolio loans more appealing to certain borrowers, such as those who don’t have excellent credit or proof of steady income. “An example of this could be a borrower who is self-employed for less than two years but has a strong business and cash flow,” Whitehead says.
Note: A prior relationship a borrower has with a bank or credit union may be key to obtaining a portfolio loan.
It’s also possible that a borrower won’t enjoy more relaxed requirements or flexibility in loan terms with a portfolio loan than with a conventional loan. Some portfolio lenders may still use strict standards in order to protect themselves and ensure they’ll make sufficient profit from these loans.
In fact, there might be a substantial tradeoff. Portfolio lenders may set higher interest rates and higher minimum down payments, and can charge additional fees that are not common with conventional lenders.
Pros and cons of a portfolio loan
As with any type of mortgage, a portfolio loan comes with benefits as well as drawbacks. For certain types of borrowers, a portfolio loan might be the best, or only, option. Here are the top pros and cons:
ProsConsLess strict credit requirements: Portfolio lenders can be more accepting of borrowers with poor credit.More accepting of inconsistent income: Portfolio loans may be more accessible to real estate investors or self-employed people with variable income.Potential for a larger loan: You might be able to secure a bigger loan with less money down than a conventional mortgage.Elevated interest rates: Portfolio lenders tend to charge higher interest rates to compensate for their increased risk.Additional fees: There may be prepayment penalties and origination fees.Can be difficult to find: Not all lenders offer portfolio loans; you may need to have an existing banking relationship to qualify for one.
How to qualify for a portfolio loan
If you’re interested in a portfolio loan, you’ll likely have to search out mortgage lenders that offer them, such as local banks and credit unions, as well as online lenders.
Once you’ve located lenders that are set up to provide portfolio loans, find out their specific application process and requirements.
Portfolio loans aren’t for everybody. But certain types of borrowers may want to give portfolio loans a closer look. Since these lenders can select their own criteria, you might be able to obtain a portfolio loan even under the following circumstances:
You have low credit score or limited credit historyYou have a high debt-to-income ratioYou’re self-employed with limited proof of incomeYou’re a non-resident alien You’re seeking to buy a renovation property You’re seeking to buy a property priced above maximum loan limits
Because portfolio lenders generally don’t restrict the number of properties you can purchase or require a certain property condition, investors may benefit from portfolio loans. This can make it easier to finance the purchase of a fixer-upper, for example, or multiple properties if you’re looking to become a landlord.
However, since borrower requirements can vary from lender to lender, it’s usually best to ask several individual lenders about their specific guidelines.
Quick tip: Working with a mortgage broker may be the best way to locate the type of lender you prefer, and a local bank or credit union may be more likely to offer portfolio loans than a big retail bank.
The bottom line
For borrowers who don’t qualify for most conventional mortgages or those under the FHA or VA umbrella, a portfolio loan can be an attractive alternative.
But remember that simply qualifying for a portfolio loan doesn’t mean it’s the best option for your situation. Be sure to evaluate the total costs associated with the loan, such as interest charges and any fees or potential prepayment penalties.