They sound complex, almost foreign because they don’t crop up as much as conventional, conforming, and government mortgages. Portfolio loans are not your typical mortgages either, making room for borrowers who are not traditional themselves.
Nonqualified mortgages and other examples of portfolio loans present an alternative source of viable mortgage financing. Learn more about these loans here and what they can do for you.
What Are Portfolio Loans?
These are home loans that are made and serviced by a lender, remaining in that lender’s portfolio throughout its life.
On a normal day in the mortgage industry, lenders sell their mortgages to investors in the secondary market so they can continue to make loans to other borrowers.
These mortgages have to meet certain standards to protect the investors who bought these loans. For loans with the government’s backing, they must meet the guidelines set by the FHA, VA, and USDA.
Fannie Mae and Freddie Mac, the biggest purchasers of loans in the secondary market, require mortgages to conform to their rules. These include debt-to-income ratios, loan-to-value ratios, down payments, private mortgage insurance, closing costs, and so on.
Since primary or portfolio lenders don’t sell their home loans to investors, they don’t have to follow guidelines set by the government agencies for their backed mortgages or the GSEs for that matter.
Moreover, lenders with portfolio loans are usually smaller banks and credit unions. Their size makes them more agile to adapt to market trends.
Benefits of Portfolio Loans
Portfolio loans are more flexible and convenient for mortgage borrowers with diverse backgrounds and needs for the following reasons.
Less traditional guidelines. Lenders who originate these loans may be more welcoming to consumers with high DTI ratios or negative events in their credit history.
Low or alternative documentation. Self-employed and high-net-worth people have income and assets but it’s difficult to trace their actual income using tax returns. Against this backdrop, there are portfolio lenders who make bank statement loans and stated income loans, among other specialized loans.
Lower costs. These loans might be less costly to make because the underwriting work is done in-house. They may not also require an escrow for property taxes and insurance premiums.
More property choices. Each loan program, the USDA for instance, has minimum property requirements before a loan securing the property is approved. Condo buyers are also required to find a unit whose building is approved by the FHA or Fannie Mae. Portfolio loans can be a good option for property flipping and real estate ventures.
Bigger loan sizes. FHA loans have loan limits per property type per county, the same goes with Fannie Mae and Freddie Mac with their conforming loan limits. If you borrow more than the ceiling loan limit for your property type, it is considered a jumbo loan and might not be approved. You are likely to find bigger loans with portfolio lenders.
Indeed, there are borrowers who can afford to take on mortgages and/or make higher down payments but have difficulty doing so because of rigid rules and requirements. If you are one of those struggling to get a traditional mortgage, a portfolio loan might just be what you’re looking for.