What Is a Portfolio Loan? [How It Works, Pros, Cons] (2024)

Getting a mortgage loan nowadays can be challenging. Not everyone qualifies for one, but that doesn’t mean you should give up the dream of buying your own house. Instead, you can seek the assistance of a portfolio loan. But what is a portfolio loan? How does it work, and who benefits from it? This article addresses these questions and aims to help you make the right decision for your financial future.

What Is a Portfolio Loan?

To understand the portfolio loan definition, it might be good to first know how a traditional mortgage works. Typically, lenders ask for a minimum requirement to move ahead in the qualification process for a loan. Then, they consider your credit score, debt-to-income ratio, and credit history. Once the loan is approved, your mortgage lender then gives you the loan amount with interest.

Most mortgage lenders sell your loan to third parties—such as Freddie Mac—on the secondary market to generate more funds to provide other people mortgages. Just as lenders require you to meet certain requirements, third parties require specific conditions to purchase a loan.

While most mortgages meet those requirements, a few do not. These then can be eligible for portfolio loans. The portfolio mortgage is kept with the lender as an in-house (or ‘on the books’) debt.

NOTE: You can seek the help of government-sponsored entities (GSEs) to finance a part of your down payment if you’re short of funds.

How Does a Portfolio Loan Work?

A portfolio loan works similarly to a traditional mortgage in that the borrower needs to make monthly payments on the loan until it’s paid off. But the difference in a portfolio loan is that the lender keeps the loan in-house because it doesn’t meet the secondary market requirements. And lenders often allow leniency towards the loan’s approval but charge higher interest rates.

Portfolio loans are rare and often go to the bank’s best customers. Even though lenders allow leniency, you must meet the internal requirements to qualify.

NOTE: Like portfolio loan lenders, there are many mortgage lenders, too, that give loans to people with bad credit.

Key Takeaways

Who Can Qualify and Benefit From Portfolio Loans?

Portfolio loans can be a good choice for those in the following cases.

• Self-employed: The self-employed can easily qualify for a portfolio loan. It also benefits the bank because it generates more business.
• Damaged Credit History: Those who have bankruptcy or foreclosure in their credit history can also qualify for a portfolio loan.
• High Net Worth: Since portfolio loan rates are generally high, they’re suitable for those with high income or high net worth but poor credit scores.
• High Debt-to-Income Ratio: DTI measures how much of your monthly income goes into paying your debt obligations. Those with a high debt-to-income ratio typically don’t get qualified for a traditional mortgage.
• Properties with Specific Conditions: To get approved for a mortgage, the property you’re buying must meet FHA property guidelines. Those purchasing a property that doesn’t qualify for traditional loans—due to its condition—may opt for a portfolio loan.
• Loan Above Loan Parameters: Mortgages have loan limits, and those who require more may not qualify. Portfolio loans are better for those who need a loan above $484,350 for a one-unit property.

NOTE: Portfolio loans can also be a good option for those who have had tax issues in their credit history.

Portfolio Loan Pros and Cons

Before applying for a portfolio loan, consider the following pros and cons.

Pros

• Better Qualifying Terms: If you have a low income but still wish to buy a house (even if you have a low credit score), a portfolio loan offers better qualifying terms than a traditional mortgage. In addition, such loans provide a low down payment requirement with more payment leniency and a good financing option for those who don’t qualify for conventional mortgages.
• Work Closely with Lender: Since the portfolio loan remains with the lender, you can work closely with them and establish a good relationship. Some portfolio mortgage lenders will also allow late payments or guide you through future loan applications or investments.

Cons

• Higher Fees: Lenders keep portfolio loans themselves rather than selling on the mortgage market. So they may charge higher fees, including an origination fee and prepayment penalties.

• Higher Interest Rates: Portfolio loans have a higher interest rate than traditional mortgages to cover the risks of the lender. But if you have good relations with the lender, they may charge a lower interest rate.

How to Get a Portfolio Loan

There’s no definitive way to get a portfolio loan. Lenders primarily use these loans to reward good customers and generate more business. Investors and those with high net worth typically obtain portfolio loans. But many also get such loans even with bad credit.

The best way to increase your chances of obtaining a portfolio loan is to open all your accounts in a local bank or credit union. Relationship banking will help develop a close tie with the bank. Then, the bank may offer you portfolio financing when the time comes.

And if you have a bad credit history, begin by getting rid of debt, even if you have no money.

NOTE: Although it’s possible to get personal loans with bad credit, you should do it only for such reasonable purposes as buying a home—wherein portfolio loans can help.

Conclusion

A portfolio mortgage lender provides loans similar to traditional mortgages, with a key difference being that portfolio loans are not sold on the secondary market. Borrowers who do not meet conventional mortgage requirements can apply for a portfolio loan since it has better qualifying terms. But the downside of this is possible high fees or interest rates that the lender may charge.