Portfolio loans: A complete guide

If you’re having trouble qualifying for one of the common loans people use to finance a home purchase, there may still be hope. It’s called a portfolio loan. A portfolio loan is a helpful tool for financing a home purchase if you’re having trouble securing a conventional mortgage loan, a Department of Veterans Affairs (VA) loan, or a Federal Housing Administration (FHA) loan.

Understanding how portfolio loans work can help you purchase a home. Let’s examine how portfolio lenders and their unique mortgage offerings can help you finance your future home purchase.

What is a portfolio loan?

A portfolio loan is a type of mortgage a lender issues and maintains as part of their investment holdings. Unlike traditional mortgages sold to investors on the secondary mortgage market, portfolio lenders originate and keep portfolio loans in-house for the life of the loan. Because the loans are held and serviced by the lenders, it gives them more flexibility when setting mortgage terms – often in the borrower’s favor.

A lender can’t sell a portfolio loan on the secondary market because they don’t use the same eligibility criteria traditional lenders use to qualify borrowers for a conforming (or conventional), FHA, or VA loan. Because portfolio loans aren’t restricted to traditional lending guidelines, prospective home buyers with nontraditional incomes or concerning credit histories can get the money they need to achieve their dream of homeownership.

How do portfolio loans work differently from traditional mortgages?

Under most traditional mortgage loan scenarios, lenders underwrite loans using specific criteria set by the government. These typically include a minimum credit score, a maximum debt-to-income ratio (DTI), a required minimum down payment, and limits on the loan size depending on the loan type. Portfolio loans don’t have to meet the lending standards set by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac.

Portfolio loans can help prospective home buyers struggling to qualify for a traditional mortgage loan get the chance to buy a home. Portfolio loans are often available through smaller banks and credit unions, whereas traditional mortgages are typically offered through a wider range of institutions.

Consider a portfolio loan if you can’t meet a traditional lender’s underwriting criteria. You won't need to meet conforming loan limits, such as minimums for credit score and down payment. Due to their looser standards, however, portfolio loans are considered riskier to the lender, which often shows up in the form of higher costs for the borrower, such as a higher interest rate.

Who might benefit from a portfolio loan?

If a low credit score, poor credit history, or self-employment is preventing you from getting a conventional mortgage, a portfolio loan may be the right choice for you. The loan also applies if you have a high debt-to-income ratio (DTI), need a loan for a property that needs serious renovations, or if a purchase price exceeds maximum loan limits allowed by the GSEs.

Before applying for a portfolio loan, consider speaking with an accounting or finance professional or a mortgage broker to help decide whether a portfolio loan makes sense.

Pros and cons of portfolio loans

Portfolio loans have benefits and drawbacks. Let’s break them down.

Pros

• More flexible qualification metrics: Portfolio loans typically have less stringent requirements for credit score, credit history and DTI ratio, making it easier for some borrowers to qualify for a loan.
• Faster access to funds: A portfolio loan has a more flexible and potentially much faster underwriting process, so it can be a valuable option to get the funds you need faster.
• Higher borrowing limits: There are no loan limits with portfolio loans, so you can borrow more than would be allowed by government-sponsored entities (GSEs) like Fannie Mae and Freddie Mac.
• More personalized service: Unlike a conventional loan, a portfolio loan is serviced by your lender, typically a smaller bank or credit union, so you’re more likely to receive fast, personalized service.

Cons

• Higher fees: Lenders can charge higher fees because they’re taking a bigger risk lending to borrowers who earn nontraditional income or whose credit history disqualifies them for traditional mortgage loans.
• Potentially higher interest rates: Lenders often charge higher interest rates to offset the additional risk they take by issuing a loan with more relaxed credit requirements.
• Potential prepayment penalties: Your lender may include a prepayment penalty clause in your mortgage contract, leading to an extra charge if you want to pay off your portfolio loan early.
• Fewer lender options: It can be difficult to find a lender who will provide you with a portfolio loan. Many lenders, especially larger companies that specialize in mortgages, do not offer these loans.

Who qualifies for a portfolio loan?

Portfolio loans are rare and often used as a “perk” lenders award to their best customers. You may be a good candidate to receive one if you’ve established a long-term relationship with the local bank or credit union. To improve your odds of getting a portfolio loan, reach out to local lenders you’ve worked with in the past and see if they’re open to it.

Don’t forget: Loan terms will vary by institution. It pays to shop around and compare loan requirements, interest rates, origination fees, and mortgage terms and conditions. While you may not need to meet FHA or VA loan lending guidelines to receive a portfolio loan, portfolio lenders expect you to meet their lending criteria.

Here are some of the key factors to consider in a portfolio loan and how they affect one another:

• Documentation: If you’re self-employed or retired, it may be harder to prove your financial profile, but a portfolio loan lender will need you to verify a level of income or savings that shows your ability to repay the loan.
• Credit score: Minimum credit score standards are more lenient for portfolio loans than for conventional loans, but each lender will still have a limit.
• DTI ratio: Your lender will want to assess your debt-to-income ratio. Some may allow for a DTI of 50% or more, but each will have a maximum they won’t surpass.
• Down payment: One of the prime perks of a portfolio loan is down payment flexibility. You can qualify without having to spend months or even years saving money for a down payment. However, your lender will still have a down payment requirement that depends on your credit score, DTI ratio, and income. 

How to get a portfolio loan

Start by comparing portfolio lenders and the loan estimates they provide. It may even be worthwhile to check how their offers compare to traditional loan products. And consider each lender’s level of customer service. If you still have questions, speak with a qualified home finance or mortgage professional to determine which loan type is right for you. Here are some key steps along the way:

• Choose the right portfolio lender: Start with smaller local banks and credit unions. If they don’t provide portfolio loans, they may have suggestions for banks that do. Your real estate agent might also have insights.
• Apply for your portfolio loan: Prepare your documents. You’ll need to prove a steady income and overall assets with bank statements and possibly tax returns.
• Complete the underwriting process: Your lender will take some time to review your finances. Based on their findings, they will propose an interest rate, down payment, and other terms of the loan. These may be negotiable, especially if you have more than one potential lender.
• Close on your portfolio loan: Your lender should inform you of what you’ll need to provide at the closing meeting, including your down payment and closing costs. To avoid surprises or unexpected costs, you should have a real estate agent to advise you on what to expect at closing and to be present when you sign for the loan.

The bottom line: Portfolio loans can unlock homeownership

Because they aren’t intended for resale and don’t have to follow the eligibility requirements of traditional mortgages, portfolio loans can be a salvation for people with a sub-par credit history, difficult-to-prove income, or seeking a loan that is larger than allowed with a conventional loan.

However, portfolio loans typically have higher interest rates and fees than FHA loans, VA loans or conventional mortgages. They’re more often available through local small banks or credit unions.

Discover which loan option is best for you and start the mortgage approval process online today.

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Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.