Are you preparing to buy a home? Portfolio lenders offer alternatives if you’re having difficulty qualifying for a loan. Unlike conventional lenders, a portfolio lender keeps the mortgage loan in its portfolio and doesn’t sell it to a third party. Portfolio lenders make loans but don’t sell the mortgage to agencies like Fannie Mae and Freddie Mac. Why should you consider portfolio lenders? Read on to understand the possible advantages of buying a home this year.
What Are Portfolio Lenders?
A portfolio lender makes and retains loans rather than selling them to mortgage agencies like Fannie Mae and Freddie Mac. This differs from conventional lenders significantly. A portfolio lender can offer more flexible mortgage terms, a faster closing and a more personalized approach by keeping the loans on their books.
How Do Portfolio Lenders Work?
A portfolio lender will offer and then retain a mortgage. As the name implies, the lender holds the loan in its investment portfolio instead of selling it on the secondary market. Portfolio lenders assume more risk than traditional lenders by holding onto the loan.
A portfolio lender can set its own standards and may approve borrowers with a lower credit score, low deposit or high debt-to-income ratio. These lenders earn revenue from origination fees on mortgages and interest payments. The spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio is another source of income for portfolio lenders.
Should you use a portfolio lender? Portfolio lenders typically offer more options to borrowers, but these options come with additional fees or higher interest rates. Working with a portfolio lender rather than a traditional mortgage lender can make sense if you want to purchase an investment property or get a jumbo loan.
What Types of Borrowers Benefit from Working with Portfolio Lenders?
While anyone can work with a portfolio lender, borrowers with unique circumstances usually pursue these lenders because of flexible terms and the possibility of higher fees. Borrowers who can secure a conventional mortgage usually get a better rate.
Self-employed people with irregular income, real estate investors and borrowers with low credit scores or high debt may benefit from a portfolio lender’s more flexible terms.
Pros of Working with Portfolio Lenders
Working with a portfolio lender has significant advantages, from a personalized approach to greater flexibility. Here is why you might work with these lenders to secure a mortgage.
Greater Flexibility
Portfolio lenders can offer more flexible loan terms and guidelines compared to traditional lenders. Suppose you’re a real estate investor with multiple properties in your portfolio or a borrower with a unique income situation. In that case, a portfolio lender can help you secure a mortgage and buy a home. Borrowers with low credit scores, low down payment or high debt may still qualify for a mortgage with a portfolio lender.
Personalized Approach
Portfolio lenders often take a more personal approach to underwriting loans, considering individual circumstances and evaluating the borrower’s overall financial picture. This means you could get approval or better terms than those a traditional mortgage lender offers.
Ability to Finance Unconventional Properties
Portfolio lenders are often willing to finance properties that may not be eligible for conventional financing, such as fixer-uppers, mixed-use properties or properties in rural areas. Likewise, investors needing jumbo loans often use a portfolio lender more willing to accommodate unusual situations.
Faster Closing Times
Because portfolio lenders typically have more streamlined processes and decision-making authority, they can often offer faster closing times than traditional lenders. This can help you in a competitive housing market or when you must close quickly for a work or school move.
Cons of Working with Portfolio Lenders
Working with a portfolio lender can be costly or may limit your options. Here are the potential downsides to consider.
Higher Interest Rates
A portfolio lender may charge higher interest rates than traditional lenders, as they take on higher risk by lending outside conventional guidelines. This can add thousands of dollars in interest payments over the loan’s lifetime.
Limited Availability
You will have more limited options if you choose to seek out these lenders. Portfolio lenders are often smaller local banks or credit unions, which may limit their availability in certain areas and restrict your options.
Potentially Stricter Terms
While portfolio lenders offer flexibility, they may also have stricter terms and requirements because of the higher risk they assume. This can mean higher fees or greater risk for the borrower in taking on the mortgage through a portfolio lender.
Limited Loan Options
Portfolio lenders may not offer the same range of loan products as traditional lenders. For example, a portfolio lender doesn’t offer government-backed loans like the U.S. Department of Agriculture (USDA), Federal Housing Administration (FHA) or Veterans Affairs VA loans or other loan options. The number of lenders you can choose from is also limited.
How to Find a Portfolio Lender in 5 Steps
Here are the steps if you’re ready to work with a portfolio lender.
1. Shop Around
Look for local banks, credit unions and mortgage firms that specifically mention portfolio lending as one of their services. You can also research lenders online and read reviews to choose the best options.
2. Check Reputation
Understanding the lender’s reputation is important to protect your interest in the property. Once you have a list of potential portfolio lenders, check their reputation and experience. Look for online reviews and testimonials and ask for referrals from friends or colleagues who have worked with them.
3. Assess Loan Options and Terms
Evaluate the loan options and terms offered by each portfolio lender. Consider factors such as interest rates, fees, repayment terms and any additional requirements they may have for borrowers.
Compare total costs and the implications or fees if you miss a payment to assess the pros and cons of each. Factor this in with reputation when considering the best available option.
4. Schedule Consultations
Use this opportunity to discuss your specific borrowing needs and goals and ask important questions about the lending process, approval criteria and potential limitations or specific considerations for portfolio lending. You can also ask about preapproval to compare the best available offers more accurately.
5. Make a Decision
Make an informed decision on which portfolio lender is best for you, considering the lender’s reputation with total interest, fees, downpayment and available loan amount.
Should You Work with a Portfolio Lender?
Working with a portfolio lender can be a smart move if you’re building a real estate portfolio or have a financial situation that makes it difficult to qualify for a conventional or government-backed mortgage. Carefully research all lender options for your situation and look at ways to increase your chances of mortgage approval. Consider researching the best conventional mortgage lenders or government-backed FHA loans to understand all your options.
Frequently Asked Questions
Do portfolio lenders offer adjustable-rate mortgages (ARMs)?
While fixed-rate mortgages from these lenders are more common, some portfolio lenders may offer adjustable-rate mortgages. Speak with lenders you’re considering using to understand their best mortgage rate offerings.
Are portfolio lenders regulated like traditional lenders?
A portfolio lender isn’t regulated like traditional lenders, allowing them to offer more personalized or lenient mortgage terms.
Are portfolio lenders more lenient with credit requirements?
A portfolio lender generally may be more lenient with credit requirements. Terms and requirements vary from lender to lender.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.