What is a portfolio loan and who qualifies?
By Brian Boucher
A portfolio loan is a loan that a bank issues to a borrower and, instead of reselling it on the secondary market as is customary with conventional mortgages, keeps the loan on its own books. These are also known as portfolio mortgages.
Borrowers who are unable to secure a conventional mortgage may qualify for a portfolio mortgage even if they have a less-than-sterling credit history. Since conventional loans, including FHA loans and VA loans, require a rigorous screening process, those looking to finance a home purchase and face obstacles to qualifying can turn to portfolio mortgages. These loans can be especially advantageous for real estate investors looking to expand.
How do portfolio loans differ from conventional loans?
Conventional loans have to meet certain underwriting terms, criteria that are aimed at ensuring that the loans are repaid. These loans are typically sold to other institutions, often government-sponsored entities like Fannie Mae and Freddie Mac, which package the loans into securities, which are then sold to investors.
These standards protect those who invest in these securities, as well as the government agencies that back them. The loan criteria include:
- A maximum debt-to-income ratio, typically 43 percent
- A higher credit rating, typically above 700
- A substantial down payment, which can range from a low of 3 percent for and FHA loan, to up to 25 percent for mortgages with better rates and lower fees
- Limits on how much money can be borrowed
Portfolio lenders, often smaller institutions and community banks that keep these loans on their own books, are not obliged to meet Fannie Mae and Freddie Mac’s high standards. Borrowers whose credit history is dinged by a previous foreclosure, a divorce, or a bankruptcy, who would otherwise be locked out of homeownership, can sometimes achieve their goal through this process. But it’s important to know that lenders typically charge higher origination fees and higher interest rates, and they often write prepayment penalties into the contract.
Those looking for very specific terms, such as an unconventional payment schedule, may find that banks are willing to meet those terms in a loan they keep on their own books.
Upsides and downsides, for lenders and borrowers
There are advantages and drawbacks to these mortgages for both parties.
From the bank’s side, most significantly, the lender is on the hook if the borrower defaults. (For that reason, they typically offer portfolio loans only to their best customers, whose business they are eager to have.) And, since they aren’t soon selling the loans on the market, they don’t get an infusion of fresh cash to originate new loans.
These loans are useful for a variety of different borrowers:
- Those who are self-employed
- Those who have a high income or net worth but a low credit score
- Those who want to buy a property that needs such extensive renovation that it wouldn’t qualify for a conventional loan
- Those who need a loan larger than the conforming loan parameters (currently set at $548,250).
Buyers unable to make the sizable down payment that is required to qualify for a conventional loan, but who otherwise meet typical lending standards, may find a portfolio mortgage the best way to purchase a home or investment property.
In these cases, private mortgage insurance may not be required, even if the borrower is making a small down payment. The borrower also may get better and more consistent customer service because the loan doesn’t change hands.
Portfolio loans may serve investors well
Portfolio loans are advantageous for some real estate investors. Portfolio lenders typically don’t place a cap on the number of properties an investor can purchase, whereas traditional lenders may be reluctant to finance more than five investment properties.
These lenders don’t always require the property to be in a minimum condition, which makes them the best bet for an investor who wants to finance the purchase of a property in need of considerable renovation.
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