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Joseph Sohm/Shutterstock June 28, 2022 Peter G. Miller is a contributing writer at Bankrate. Peter writes about mortgage rates and home buying. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. With most mortgages, the lender that originates the loan doesn’t actually hold on to the loan. Instead, it gets bought and sold on the , which helps free up capital and allow other prospective homeowners to borrow money. There are, however, some exceptions that don’t wind up being . They’re called .
What is a portfolio loan
A portfolio loan is a kind of mortgage that a lender originates and retains instead of offloading on the secondary mortgage market. Appropriately named, a portfolio loan stays in the lender’s portfolio, never entering that web of behind-the-scenes buying and selling. Why does that matter? Because the lender gets to pick the standards for the loans – what kind of credit score they’ll approve and how much money they’ll offer to the borrower, for example – instead of adhering to .
How portfolio loans work
A portfolio loan has plenty in common with non-portfolio mortgages: You’re still going to apply to borrow a chunk of money, and a lender will assign a level of risk to you as a customer based on the likelihood that you are going to be able to pay it back. However, portfolio standards often differ from Fannie Mae, Freddie Mac and government-insured loan requirements. Those tend to have rigid requirements around credit score, down payment contributions and debt-to-income ratios. For the lender, a portfolio loan comes with one key difference: 100-percent liability if the borrower defaults. Because they are riskier propositions, plenty of portfolio loans may charge higher interest rates and higher origination fees for the borrower.
Pros and cons of portfolio loans
A portfolio loan can be a smart move — it may offer more liberal underwriting standards, require a lower credit score and a smaller down payment and allow you to borrow more than you could with another type of mortgage. In some cases, though, you may not want one. Here’s a rundown of the pros and cons of portfolio loans: Pros
A good option if you have bad credit. Let’s say that a period of bad luck pushed down your credit score — maybe you’ve had a few months of low income or unemployment, or both. Financial hits like that don’t look good on paper, so you may not be able to get a typical mortgage. If you have a history of solid credit and consistent income otherwise, a bank may agree to offer you portfolio financing for a home, and with more flexible underwriting. It’s also why portfolio loans can be strong candidates if you need to . Helpful for self-employed borrowers. Being your own boss can be a good feeling – until you apply to borrow a big chunk of money for a home. Traditional mortgage lenders will like to see steady employment, so a fluctuating income from independent contracting work or a small business might hold up your application. Portfolio lenders tend to be more willing to work with self-employed individuals . Good for real estate investors. Many portfolio lenders are community banks with a connection to an area – a helpful characteristic for real estate investors looking to buy distressed properties for a . So, if you’re looking for financing to help your real estate investing strategy, portfolio loans can be especially attractive. More flexibility. One of the big (the classification that portfolio loans tend to fall under) is that borrowers can do things they can’t do with conventional loans – borrow more money, put less down and potential avoid mortgage insurance even with smaller down payments. Cons
The potential for a much higher interest rate. Remember that with a portfolio loan, the lender is losing the chance to resell the debt into the secondary market. That’s an opportunity cost, and the lender may well want a higher interest rate to make up for it. The lender may also charge a higher interest rate in exchange for more flexible underwriting and more risk. Costly fees. A lender might charge higher fees on a portfolio loan. Since they’re offering greater flexibility to borrowers who might not be able to qualify elsewhere, they can use that power to their advantage. Simply put, borrowers have limited options to compare. Not always flexible. A portfolio loan is designed to be held by the lender until the property is refinanced or sold, but sometimes, a lender will want the option to sell the loan in the future. In that case, it might create a portfolio loan within Fannie Mae or Freddie Mac standards, so a borrower will have to meet many of the usual underwriting requirements. In this case, there’s little advantage to a borrower with poor credit, or one who needs a jumbo loan. How to get a portfolio loan
You likely won’t find portfolio lenders simply by comparing . Whether you’re looking to buy a new home or , you’ll need to do a bit more digging to find . One of the best routes is to work with a , who works to match your specific needs with lenders that can meet them. Additionally, you should look into local community banks in your area to see if they keep loans on their own books. Just remember to compare portfolio loans with traditional options, too, to make sure you get the best deal. SHARE: Peter G. Miller is a contributing writer at Bankrate. Peter writes about mortgage rates and home buying. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Related Articles