Portfolio lenders follow the same loan process as other lenders; however, they do not sell mortgages to agencies like Fannie Mae and Freddie Mac. Instead, they keep the loans on their books and usually service them. According to the Urban Institute, 23.7% of mortgages in 2022 were originated by portfolio lenders.
If you have bad credit or a lot of debt that could make it challenging to get approved for a mortgage because of the strict borrower requirements of Fannie and Freddie, you should think about using a portfolio mortgage lender.
What is a portfolio lender?
A portfolio lender provides mortgages to consumers, but unlike other lenders, they don’t transfer/sell those mortgages to Fannie Mae, Freddie Mac, or other agencies.
It is not mandatory for lenders to sell loans on the secondary mortgage market, despite it being a common practice. Banks, which usually have significant amounts of cash, have the option to originate mortgages and retain them as assets. These loans are known as portfolio loans because they are part of the lender’s portfolio.
If a loan is held in a portfolio, the lender can set its own approval standards rather than having to follow the requirements for selling loans on the secondary market. The lender might choose to use conforming loan standards, or they might have their own criteria. This means they may be willing to consider applicants with lower credit scores or higher monthly payments.
Fannie Mae, Freddie Mac and conforming mortgages
Fannie Mae and Freddie Mac buy mortgages from lenders that meet their standards, called conforming mortgages. These mortgages must adhere to requirements such as maximum loan size, debt-to-income ratio (DTI), and loan-to-value ratio (LTV).
If you don’t meet the conforming loan standards, you’ll need to find lenders with looser requirements because many other mortgage buyers also follow these standards.
Due to increasing interest rates, borrowers face challenges in meeting debt-to-income requirements as monthly payments become more expensive. In Q1 2023, the national household debt grew by 0.9%, as reported by the Federal Reserve Bank of New York. The Mortgage Bankers Association stated that the average mortgage payment has also increased by 28.7% from early 2022 to early 2023.
If you are facing financial stress, you may find a portfolio loan more appealing because it often has less strict requirements for debt-to-income ratios.
Pros of portfolio lenders
Borrowers might find portfolio lenders appealing for various reasons such as:
Portfolio lenders offer the benefit of not being restricted to the rules of traditional mortgages. This means that you may be eligible for a loan with a portfolio lender even if you do not meet the usual requirements.
Portfolio lenders have the ability to provide more flexibility because the loans they offer do not have to adhere to the usual standards for resale on the secondary market. This means they can offer customized repayment plans, bigger loan amounts, smaller down payments, and other alterations to meet the specific needs of their borrowers.
Less servicer uncertainty
Portfolio lenders often keep the loans they originate from and handle the servicing themselves. This means you don’t have to worry about your loan being sold to a new servicer multiple times, which can be a hassle.
Cons of portfolio lenders
Portfolio lenders may not be the best option for all situations as they have certain disadvantages, such as:
Having standard loan requirements helps reduce the risk for lenders, allowing them to sell their loans and further mitigate risk. However, portfolio lenders hold onto their loans until they mature and therefore take on more risk, resulting in potentially higher rates and fees for borrowers.
Portfolio loans often come with prepayment penalties, which are fees you have to pay if you pay off your loan early. If you choose to move or make extra payments before paying off your loan within a specific timeframe, you’ll be charged this fee.
How to find a portfolio mortgage lender
Portfolio loans are often not advertised as much as other mortgage options, or sometimes not advertised at all.
- If you have been banking or getting a mortgage from a lender for a long time, or if the lender is interested in your business, you have a higher chance of obtaining a portfolio loan.
- If you have difficulty obtaining a loan, a portfolio lender might be willing to work with you. However, they may charge a greater interest rate or higher initial fees due to the elevated risk. Despite this, it could be a preferable alternative to not getting a new loan.
When it comes to mortgage financing, not every loan is suitable for every borrower. A loan with a low-interest rate may still not be a good deal if it has significant upfront fees. To determine the overall cost, always compare the APR, which includes these fees. If you plan on moving in the next few years, refinance might not be financially beneficial if you cannot recoup the costs within that period. Therefore, do your calculations before making any decisions.
To find a portfolio loan, it’s recommended that you inquire with lenders, title companies, and real estate agents. Keep in mind that some direct lenders are also portfolio lenders, and there are hybrid lenders who may sell some loans to Fannie and Freddie while keeping others in-house.
If your income is irregular or you don’t meet the requirements for a conforming mortgage, you should start looking for a mortgage with portfolio lenders. Mortgage brokers can be very useful in helping you find lenders who offer such loans.