Portfolio Loans Guide: How They Work

What is a portfolio loan?

A portfolio loan is a mortgage that a lender creates and retains in its portfolio, rather than selling it, like most U.S. mortgages. That means the lender can choose its own loan terms, such as the interest rate and minimum credit score requirement.

Portfolio loans vs. traditional mortgages

Portfolio loans tend to have more flexible financial requirements than regular mortgages. That’s because most traditional mortgages are sold soon after closing on the secondary mortgage market — a process that helps generate more money to make more mortgages. Most U.S. mortgages are bought by Fannie Mae and Freddie Mac.

To be eligible for sale, however, a mortgage has to meet certain “conforming” standards, such as a minimum credit score and maximum debt ratios. Because lenders don’t sell portfolio loans, these standards don’t apply to them. You may qualify for a portfolio loan if you’re not eligible for a traditional loan, or you may be able to borrow more or obtain the loan faster if it remains in the lender’s portfolio.

However, conforming standards exist for a reason: They help protect borrowers and lenders against the risk a borrower doesn’t repay the mortgage. Because portfolio loans pose a greater risk, they may have higher interest rates and fees. They’re also less widely available than regular mortgages. Some lenders who offer them don’t even advertise them.

Portfolio loan requirements

The requirements for a portfolio loan vary widely because the lender can set its own loan terms. Here are some qualifications you may find:

• Credit score: California-based Self-Help Federal Credit Union accepts credit scores as low as 580, as does Michigan-based Northpointe Bank. You may qualify at Virginia-based Atlantic Union Bank with a credit score between 620 and 680, depending on your down payment.
• Down payment: Self-Help’s portfolio loan requires a 3 percent down payment. At Atlantic Union Bank, you can qualify for 100 percent financing with a 680 credit score.

Note that many portfolio loans — including Self-Help’s, Atlantic Union’s and Northpointe’s — don’t require mortgage insurance, even for down payments of less than 20 percent.

Portfolio loan pros and cons

Pros

• Bigger loan options: Borrowers who need a jumbo mortgage but can’t make a larger down payment might find more flexibility with a portfolio option.
• Flexible underwriting: Borrowers who have a variable income, holes in their credit histories or a lower credit score might qualify for a portfolio loan.
• More hands-on or personalized service: Many portfolio lenders are community banks with a connection to the area. That can mean better customer service or more willingness to find creative solutions.

Cons

• Potential for a much higher interest rate: Remember that with a portfolio loan, the lender is losing the chance to resell the debt in the secondary market. The lender could charge you a higher interest rate to make up for it.
• Higher fees: The lender might also charge more or more onerous fees in exchange for the additional risk.
• Still some standards to meet: Sometimes, lenders still want the option to sell the portfolio loan down the line. In that case, you might have to meet many of the usual underwriting requirements imposed by Fannie and Freddie.

Is a portfolio loan a good idea?

If you have good credit and a steady income, you’re likely a better candidate for a conforming loan than a portfolio loan. Still, a portfolio loan could make sense in these cases:

• You have significant assets, but less stable income: Maybe you own a large chunk of valuable stocks, but you don’t want to sell them. A portfolio loan might let you borrow against their value.
• You’re a small business owner or self-employed: If your income isn’t documented in a traditional W-2, or you have extensive business records you plan to include in your mortgage application, the underwriting process for a portfolio loan might be a bit more manageable.
• You’ve encountered some major financial hurdles in the past: If your credit score needs work or you went through a bankruptcy, for example, it might be easier to get approved for a portfolio loan.

How to get a portfolio loan

Banks and other types of lenders don’t always promote portfolio loans in the same way they do regular mortgages. A mortgage broker can help you find a lender that specializes in portfolio loans.

You can also ask your own bank: Some will do it as a special accommodation, though you’re more likely to get a portfolio loan if you’ve been a long-time customer. Keep in mind, too, that the bank might require you to maintain accounts with minimum balances in order to qualify.

Note: Some predatory lenders tout portfolio loans. Make sure any institution you deal with is an FDIC member or listed with the Nationwide Mortgage Licensing System and Registry (NMLS):

In addition, it’s wise to have a real estate attorney review the lender’s documents for any unusual features, charges or conditions.

FAQ

• Can you write off interest on a portfolio loan?
  

  If you itemize deductions, you can deduct the interest paid on a portfolio loan from your federal tax return, up to certain limits.