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Westend61/Getty Images July 15, 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
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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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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. 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 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, and 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. can be especially helpful in putting you in touch with lenders that make these loans. 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