What is a portfolio mortgage loan?
A portfolio loan is a kind of mortgage that a lender creates and maintains instead of offloading into the secondary mortgage market. Because a portfolio loan is kept in the lender’s portfolio, or “on the books,” the lender sets the standards – and sometimes favorably for borrowers.
How portfolio loans work
Portfolio loan standards may differ from those of Fannie Mae, Freddie Mac, and government insured loan requirements, which could help borrowers having difficulty obtaining approval for other more common types of loans. Benefits may include:
A portfolio loan can be attractive to borrowers in certain situations.
- Let’s say a period of bad luck brought your credit score down – you may have had a few months of low income or unemployment, or both. Financial successes like this don’t look good on paper, so you might not be able to get a typical mortgage. If you have a strong credit history and otherwise consistent income, your bank may agree to offer you portfolio financing for a home, and with more flexible underwriting.
- If you own a local business (maybe you are a doctor or lawyer), a bank may also offer you a special offer in the form of a wallet loan. Why? If you are a business owner, banks want the accounts to be linked to your business and have a relationship with you. For the bank, a portfolio loan is a way to generate more business, which is why they can offer you a mortgage for your home with an attractive interest rate, low financing or jumbo financing.
Portfolio loans are rare, however. Typically, a lender creates a loan and sells it on the secondary market to raise new capital to keep creating new loans. With a portfolio loan, there is no sale, so the lender is 100% liable if the borrower defaults. Plus, there is no new money to get more loans.
For this reason, portfolio loans generally go to the best clients of the lender, those who are most likely to generate a lot of future business.
Yet no matter who the borrower is, a lender cannot just hand over checks. The loan must meet their internal requirements, such as verifying that the borrower has the capacity to repay the debt and does not represent excessive risk.
Why a wallet loan isn’t for everyone
A portfolio loan can be a smart move: it can offer more liberal underwriting standards, require a lower credit score and a smaller down payment, and allow you to borrow more than with another type of mortgage. In some cases, however, you may not want one. Here’s why.
- There is a possibility of a higher interest rate. A portfolio loan may be offered at a lower interest rate, but this is not always the case. Remember that with a portfolio loan, the lender loses the ability to resell the debt in the secondary market. This is an opportunity cost, and the lender may well want a higher interest rate to offset it. The lender may also charge a higher interest rate in exchange for a more flexible and riskier underwriting.
- There could be costly fees. A lender might charge higher fees on a portfolio loan because they are losing money elsewhere. In today’s low interest rate environment, for example, bank revenues are falling substantially. One way to compensate is to provide portfolio loans to marginal borrowers with higher fees.
- They are not always flexible. A portfolio loan is designed to be held by the lender until the property is refinanced or sold, but sometimes a lender will want the option of selling the loan in the future. In this case, it could create a portfolio loan that meets Fannie Mae or Freddie Mac standards, so a borrower will have to meet a lot of the usual underwriting requirements. In this case, there is little benefit for a borrower with poor credit or a borrower in need of a jumbo loan.
How to get a wallet loan
Portfolio loans are generally not advertised – they are really a device or benefit that lenders use to get more business and reward good clients. Even so, you should shop around and ask your bank and other local lenders if they can offer you portfolio financing.
One of the best ways to increase your odds is to use your local bank for your checking, savings, retirement, and business accounts. Get to know your local loan officers and branch managers and develop a relationship. You might then find that when you have a financial need, such as wallet financing, your bank will be happy to help.