Portfolio loan mortgages: what they are and how they work

An alternate option if you don’t qualify for a traditional mortgage

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If you’re in the market for a home loan but are worried about qualifying for a traditional mortgage, a portfolio loan mortgage is another option. These loans are owned by the lender and not held to the standards set by Fannie Mae and Freddie Mac.

If you have poor credit, limited credit history or a higher-than-normal debt balance, using a portfolio loan may be a good way to become a homeowner, as long as you understand the risks.


Key insights

  • Portfolio loan mortgages are not held to the qualification standards set by Fannie Mae and Freddie Mac.
  • If you have an atypical financial situation, a portfolio loan mortgage may be your best (and possibly only) mortgage option.
  • Portfolio loans often have higher interest rates than conforming mortgages due to the risk the lender takes on.

What is a portfolio mortgage?

Brian Kimball, a senior mortgage advisor at Waterstone Mortgage, defined portfolio mortgages as “[mortgages] that the originating lender has created their own guidelines for, which does not necessarily meet the conforming guidelines, and the lender will hold that loan instead of transferring it to another lender. Portfolio loans often fill a gap of financing needs that is not met via conforming loan programs.”

Most banks offer mortgages that conform to standards set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that purchase mortgage loans. These standards include minimum credit score and income requirements as well as maximum debt-to-income (DTI) ratios.

Banks can sell off conforming mortgages to Fannie Mae and Freddie Mac, which frees up capital and allows the banks to continue originating mortgages for new borrowers. But some home loans are not sold off and instead are kept as part of the investment portfolio of a bank, hence the name “portfolio mortgages.”

Portfolio loans are great for applicants who don’t meet the criteria set forth by Fannie Mae and Freddie Mac. But since the loans are held by the banks and can’t be sold off, they typically carry higher interest rates and fees to offset the risk of lending to atypical borrowers.

How does a portfolio loan work?

A portfolio loan mortgage functions in a similar way to a traditional mortgage, with a few key differences. While conforming loans have government-mandated borrowing limits and minimum credit score requirements, portfolio loans do not.

Your lender can show you portfolio loan options that might allow you to borrow with no down payment or a low credit score. A portfolio loan might also allow you to access a loan amount that exceeds the government-set limit for conforming mortgages.

Portfolio loans often fill a gap of financing needs that is not met via conforming loan programs.”
— Brian Kimball, The Kimball Group at Waterstone Mortgage

A portfolio loan’s requirements are set by its lender, so you can expect an easier application and approval process. For example, while FHA mortgages typically require a minimum 580 credit score, portfolio loans may be available to borrowers with a score under 580. And lenders that offer portfolio loans may be able to qualify borrowers based on held assets instead of regular income, giving more flexibility in the underwriting process.

However, because your lender holds the loan, it may charge a high origination fee and interest rate. This may mean borrowing at an annual percentage rate (APR) of 1% or more than market mortgage rates.

You may also need to bring a higher down payment to the closing table, with many portfolio loans requiring 20% down at a minimum.

» MORE: What is the average down payment on a house?

How to get a portfolio mortgage

If you’re in the market to buy a house, the process for applying for a portfolio loan mortgage is very similar to getting a conforming mortgage. You’ll still need to submit your financial details and undergo a credit inquiry.

But unlike with traditional mortgage loans, the lender may have more relaxed approval criteria, with lower credit score minimums and higher maximum loan amounts. With portfolio loans, the lender performs the underwriting and may be able to approve you for a loan that you otherwise wouldn’t qualify for.

These mortgages are not necessarily advertised as “portfolio loans,” but you can find these flexible loans by working with a trusted lender that offers more than just conforming loan options. Working with a mortgage broker will allow you to shop the rates and terms of several lenders at once to find the best fit for your situation.

Portfolio loan pros and cons

Portfolio loans offer more flexible mortgage options for borrowers who can’t otherwise qualify for a mortgage. But the fees are typically higher, and the terms of the loan may be less favorable than a traditional loan.

Consider the pros and cons of a portfolio loan as you decide if it’s right for you.

Pros

  • Portfolio loans can be easier to qualify for than traditional mortgages.
  • You can get a larger loan amount with a portfolio loan than you can with a conforming loan.
  • Portfolio loans may allow for more creative financing options for your home purchase.

Cons

  • A portfolio loan might come with a higher origination fee than most traditional mortgages.
  • Portfolio loans typically charge high interest rates.
  • There may be extra restrictions that apply to a portfolio loan, such as a prepayment penalty.

Should you get a portfolio loan?

Portfolio loans are ideal for borrowers who don’t qualify for a traditional mortgage and are looking for more flexible loan terms. If you have a poor credit history or a higher DTI ratio than allowed by Fannie Mae and Freddie Mac, a portfolio loan may be one of your better mortgage options.

Portfolio loans are strong options for borrowers in unusual financial circumstances, including self-employed individuals and those with a low income but a high net worth.

But before applying for a portfolio loan, you need to understand all the terms and conditions of taking out this kind of loan. A portfolio loan might offer flexible financing but can come with a high interest rate. It may also charge an additional fee if you pay off the loan early or refinance it before a certain amount of time has passed following closing.

» MORE: 9 mortgage questions to ask your lender

What do you prioritize most?

FAQ

Is it hard to get a portfolio loan?

Portfolio loans can actually be easier to obtain than traditional mortgages for applicants who have a poor credit history or high DTI ratio. Some lenders offer flexible terms for their portfolio loans, which help borrowers who have trouble qualifying for standard loan products.

What is the average rate on a portfolio mortgage?

Portfolio loans can’t be sold to Fannie Mae and Freddie Mac, so, in order to make a profit, they generally charge higher interest rates than conforming mortgages. Portfolio loan rates vary by lender and mortgage type, but they are usually at least 1% higher than market rates.

What is the down payment on a portfolio loan?

Portfolio loans are known to be very flexible, and some even offer a no-down-payment option. Down payment requirements are set by lenders and can vary from one portfolio loan to the next. The required down payment amount will depend on the borrower’s credit profile and the loan’s terms.

Why are portfolio loans expensive?

Portfolio loans are typically more expensive than traditional loans because they cannot be sold off to Fannie Mae or Freddie Mac and are instead kept as part of a lender’s investment portfolio. To hedge their risk and ensure a profit, lenders typically charge high interest rates and origination fees on portfolio loans, and they may even include prepayment penalties.

Bottom line

Portfolio loan mortgages are loans that offer more flexible financing terms for homebuyers who might not qualify for conforming mortgages.

While a portfolio loan’s fees and interest rate might be higher than a conventional mortgage, it can be a good option if you have poor credit or a high debt load. Just be aware of all the terms and conditions before applying to make sure a portfolio loan fits your financial situation.


Article sources
ConsumerAffairs writers primarily rely on government data, industry experts and original research from other reputable publications to inform their work. Specific sources for this article include:
  1. Fannie Mae, " Chapter B2-1: Mortgage Eligibility ." Accessed June 14, 2023.
  2. Freddie Mac, " Home Possible ." Accessed June 14, 2023.
  3. U.S. Department of Housing and Urban Development, " Let FHA Loans Help You ." Accessed June 14, 2023.
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