If you’ve applied for a mortgage and been turned down, you might want to look for a lender whose requirements are more flexible. Portfolio lenders have more leeway to set their own qualification guidelines and might work with you when other lenders have said no.
What Is a Portfolio Lender?
A portfolio lender is a lender that issues mortgages and keeps those loans as investments rather than selling them.
Portfolio lenders are typically banks, although in some cases, insurance companies work with nonbank mortgage originators to offer portfolio loans.
Data from the Urban Institute shows that 23.7% of new mortgages in 2022 were portfolio loans.
[Read: Best Mortgage Lenders]
How Do Portfolio Loans Differ From Other Mortgages?
Because portfolio loans don’t go on the secondary mortgage market, they aren’t subject to the rules for mortgages that are sold to investors. Portfolio loans are nonqualified mortgage loans, which means they don’t adhere to a set of standards published by the Consumer Financial Protection Bureau. That includes limits on interest rates, fees, the length of the loan and a ban on certain loan features that could make repayment difficult.
Portfolio loans are also nonconforming loans, as they don’t conform to the standards for mortgages that are sold to Fannie Mae or Freddie Mac.
It can be easier to qualify for portfolio loans than for conforming loans or other qualified mortgage loans because lenders can set their own requirements for income, credit scores and other criteria.
“Those loans are underwritten in a bit more bespoke manner. And, many times, exceptions are made to guidelines for borrowers who have compensating factors,” says David Adamo, chief executive officer at Luxury Mortgage Corp.
Portfolio loans tend to be more expensive than conventional loans. “The interest rate and fees are typically going to be a little higher for a portfolio loan because of that additional risk for the lender,” says Matt Allen, vice president of portfolio lending at North American Savings Bank.
Reputable lenders charge APRs that are 1% to 3% higher on portfolio loans, he says, and they generally require borrowers to pay at least one mortgage point upfront.
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Types of Portfolio Loans
There are a few varieties of portfolio loans, and each allows borrowers to present a different form of evidence that they can repay the loan.
You may come across the following portfolio loan types:
— Bank statement loans. A borrower can qualify for this type of loan based on deposits into their bank account over the past 12 or 24 months. Thus, this product is open to borrowers who have regular income from nontraditional sources. “If you’re self-employed, a bank statement loan might be a good product for you,” Allen says.
— 1099 loans. Self-employed borrowers who receive 1099 statements can use those documents as proof of income for this loan.
— Asset depletion loans. This mortgage requires significant savings that the borrower can draw on to make payments. “You may have a retiree that doesn’t have W-2 income, but they have large liquid funds that they can use to qualify,” Allen says.
— Debt service coverage ratio loans. If you’re investing in real estate, this loan allows you to qualify using the cash flow from a property rather than your personal earnings.
— IRA nonrecourse loans. This type of mortgage can be an option if you’re buying an investment property through a self-directed IRA. “Nonrecourse” means the lender can foreclose on the property if you don’t repay the loan, but it doesn’t have a legal claim on the money in your IRA or your other assets.
Qualifying for a Portfolio Loan
The process of applying for a portfolio loan is very similar to the process for a conforming loan. You’ll need to provide your Social Security number and photo ID, pay stubs, W-2s, tax returns and bank statements. If you’re trying to qualify based on an alternative income source, you’ll need to show documentation of that nontraditional income.
You’ll also need to prove you have funds to cover the down payment. According to Allen, a down payment on a portfolio loan is typically at least 10% to 15%. A borrower who has a low FICO score or who’s recently experienced bankruptcy or foreclosure may be asked for a down payment of 30% to 40%.
And as with any mortgage, the lender will require an appraisal to verify the property’s value.
[Read: How to Get a Mortgage With No Down Payment. ]
Pros and Cons of Portfolio Loans
The main advantage of a portfolio loan is that it offers opportunities for borrowers who can’t get a conforming loan. “There may be just one thing that doesn’t fit for that borrower, like their debt-to-income ratio is too high, so they’re unable to qualify with a conventional product,” Allen says.
Portfolio lenders can be more flexible than other lenders and may be willing to work with borrowers who have unusual sources of income, lower credit scores or a recent foreclosure. Portfolio lenders try to ask a lot of questions and learn about borrowers’ circumstances to see if there’s a mortgage product that’s suitable. So you might prefer a portfolio lender if your finances are out of the ordinary in any way.
Portfolio lenders may offer multiple mortgage products to fit different financial situations, which can be a plus if you’re trying to secure financing on a tight deadline, Adamo says. “If you apply to a lender that only has one option, then if that one option doesn’t work out, you have to start all over again with a new institution.”
Portfolio loans have potential drawbacks, though, including higher interest rates and fees. You may also need to come up with a large down payment.
And because portfolio loans don’t come with the protections of a qualified mortgage, they can include nonstandard loan features like balloon payments that could make them harder to repay, or they can require very large payments of points or fees upfront.
For this reason, it’s important to consider each portfolio loan’s characteristics carefully and apply only with lenders you trust.
How to Find a Portfolio Lender
You can find portfolio lenders by checking with banks you’re familiar with or searching online.
Do your homework to make sure the lenders you find are reputable. If a lender is a bank, it should have FDIC membership. And any mortgage originator should provide its mortgage license number.
You can look up lenders by name or license number on the Nationwide Multistate Licensing System consumer access site to confirm that their license is current and to see if they’re in good standing with state and federal regulators.
Adamo recommends looking for portfolio lenders that have been in business for several years and that are licensed in multiple states. “The more states that a company holds licensing in, the more states regulate that entity and the more likely it is that it’s a sound organization,” he says.
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What Is a Portfolio Lender? originally appeared on usnews.com
