Typically, a lender originates a mortgage and then turns around and sells it on the secondary mortgage market. Conversely, a portfolio loan is when a lender originates the loan intending to keep it rather than sell it. There is a set of standards and requirements that must be met to sell on the secondary market. The originator who intends to offload the mortgage must abide by these general requirements and standards. If they intend to keep it as a portfolio loan, they can set the terms to whatever they wish, often in a manner favorable to the borrower.
Portfolio Loan Basics
As alluded to above, the standards imposed for portfolio loans can differ between government-insured loan programs like Freddie Mac and Fannie Mae. Since the requirements are strictly up to the originator, they can have favorable terms for those struggling to get a non-portfolio loan.
For example, the lender can set any down payment requirements they wish. There are no regulations or requirements they must follow. They can easily offer no-down-payment loans if they wish. Also, private mortgage insurance does not have to be required if the lender wishes to remove that hurdle, even with no or little down payment. Finally, there are no conforming loan limits that the size of the loan must match.
Here are a couple of examples in which a portfolio loan may be more appealing to a borrower:
Financial Issues
Financial and credit problems can hurt your chances of getting a loan. If you are coming out of a bad spot, such as your credit score dropping due to a lapse in a steady income, unforeseen expenses that made covering all expenses impossible, or unemployment, a lender may see you as a risk. On paper, these are big red flags that most standard mortgage originators will avoid, making it difficult or even impossible to get a standard mortgage. However, if your credit history and income history are solid outside of the recent past, and the issues leading to the downturn have been rectified, your bank may be willing to offer a portfolio mortgage. This offer may consist of underwriting that’s more flexible and amenable to your current situation.
Local Business Owners
Another scenario in which a portfolio loan may be attractive to a lender is if you’re a local business owner. The bank will want all of your accounts related to you and your business. Therefore, to entice you to bank with them for your business accounts and personal accounts, they may offer a portfolio loan that has terms that are very favorable to you.
While portfolio loans can be an attractive option for buyers and can benefit the originator as well, they tend to be rather rare. In most cases, the lender will originate the loan and turn around and sell it on the secondary market to have more funds to offer more loans. In the case of a portfolio loan, there’s no sale to generate more capital to offer more loans. Also, the originator has 100% liability if the borrower defaults on their loan by not selling the mortgage.
As a result, most portfolio loans occur in situations like the second example above. The granting of a portfolio loan with favorable terms to the borrower will lead to more business for the bank in the long run. Regardless, the lender still needs to have internal requirements to ensure the borrower is not an unacceptable risk and can repay the loan in its entirety.
Portfolio Loans Are Not for Everyone
The borrower has several potential upsides regarding portfolio loans in the form of higher borrowing limits, lower down payment, lax credit score requirements, and other borrower-friendly underwriting standards. However, the emphasis should be placed on “potential” as portfolio loans may not always be the best option. Portfolio loans are wide open, entirely at the lender’s discretion as far as terms and requirements. While that can be a good thing, it can also have downsides, including:
Higher Interest Rates
The interest rate could be significantly higher in some circumstances in which the borrower cannot get traditional funding. The lender also gives up the chance to resell the debt right away, which marks an opportunity cost that the lender may recoup with higher interest rates. The higher interest rate can also be imposed on the borrower in exchange for more lenient underwriting and the subsequent increase in risk.
Higher Fees
The lender may also charge higher fees as another way to recoup opportunity costs and assume more risk. When overall interest rates are low, the bank’s revenue declines. In order to recoup that last revenue, they may charge more fees to make portfolio loans available to fringe borrowers who struggle to get financing elsewhere.
Inflexibility
While they can be more flexible than a traditional mortgage, that’s not always the case. Usually, a portfolio loan is meant to be held by the lender until the property is sold or refinanced. However, some lenders may generate portfolio loans to retain the option to sell in the future. In that case, a portfolio loan would have to be developed under the same standard as a Freddie Mac or Fannie Mae loan, making the requirements the same as a traditional mortgage. There is little to no advantage in this scenario to the borrower.
Obtaining a Portfolio Loan
Typically portfolio loans are not advertised publicly. Usually, they are used as a perk to generate more business or reward customers for continued business. If you find yourself in a position where a portfolio loan may be advantageous to you, make sure you talk to your bank and other local lenders, specifically to determine if they offer portfolio loans.
If you want to increase your chances of obtaining a portfolio loan now or in the future, use a local bank for all your accounts like savings, checking, business, retirement, etc. Establishing a solid relationship with your local bank and getting to know the local branch managers and loan officers while conducting other business will help tremendously, when and if, you need portfolio financing.
If you’re looking for loan options, reach out to the knowledgeable team at Titan Funding. We just may have the loan that you need. You can reach us at 855-929-1134 or fill out our convenient and secure online messaging form. A member of our team would be happy to answer any questions you may have.