What is a portfolio loan?

Quick insights

• Portfolio loans are mortgages that lenders can keep in their own investment portfolios.
• Lenders can set their own terms and criteria for portfolio loans.
• Portfolio loans can offer a personalized mortgage option but can also come with higher interest rates and stricter requirements than traditional mortgage options.

A portfolio loan is a type of mortgage where the loan provider keeps the loan in-house rather than selling it to investors. Let’s take a closer look.

How do portfolio loans work?

Mortgage providers usually tailor the terms of portfolio loans based on the borrower’s specific needs. Here are some important characteristics:

• Underwriting process: Evaluated case-by-case, often using a more holistic view of the borrower.
• Flexibility: Offers customizable terms like adjustable rates or unique down payment options.
• Documentation: Generally, portfolio loans require specific financial documents like tax returns.

How do portfolio loans differ from traditional mortgages?

Portfolio loans and traditional mortgages differ in terms of structure, qualification and property eligibility.

• Interest rates and terms: Traditional mortgages usually offer lower interest rates and fixed terms. In contrast, portfolio loans often have higher rates but more flexible repayment options, as they are kept by the loan provider.
• Qualification criteria: Traditional mortgages rely on strict credit score and debt-to-income (DTI) requirements. Portfolio loans often have more lenient qualification standards by comparison, often making this type of loan ideal for borrowers with non-traditional financial profiles.
• Eligible property types: Portfolio loans can be used for a wider range of property types that traditional mortgages might not cover, such as 1-4 units or complex properties with higher levels of risk.

Who is a portfolio loan best for?

Portfolio loans may be ideal for borrowers who need flexible terms or cannot meet traditional mortgage requirements. For example, when reviewing applications, mortgage providers may consider a broad range of income sources and credit history. This might benefit applicants in certain financial situations, such as self-employment or little to no credit.

Pros and cons of portfolio loans

Portfolio loans offer flexibility, speed and tailored options for borrowers, but they also come with certain trade-offs.

Pros of portfolio loans

• Flexibility: They can be customized to fit unique borrower needs, such as non-standard property types or unconventional financial situations.
• Faster approval process: Since these loans are kept in-house, lenders can often approve them more quickly than traditional mortgages, making them good choices for time-sensitive situations.
• Establishing or improving credit: By making consistent, on-time payments, you can gradually build or boost your credit score. Over time, responsible management of a portfolio loan can improve creditworthiness, which could make it easier to qualify for better loan terms in the future.

Cons of portfolio loans

• Higher interest rates: Since the lender retains the risk, portfolio loans typically come with higher interest rates than traditional mortgages.
• Stricter qualification criteria: While more flexible in some ways, portfolio loans can still have stringent qualification standards, especially for larger loan amounts or high-risk properties.

Portfolio loans in real estate

Portfolio loans are commonly used by real estate investors for non-traditional properties.

• Purchasing investment properties: These loans help finance 1-4 units or commercial properties, or those needing significant repairs, that may not qualify for traditional mortgages.
• Advantages for investors: They offer specific terms and can cover unique or high-risk properties.
• Risks and considerations: Higher interest rates and stricter requirements are potential drawbacks. You should assess the market risks and potential challenges in repayment.

How to get a portfolio loan

Getting a portfolio loan can be an option for those in unique financial circumstances or those interested in complex properties. Follow these steps to guide you through the process:

1. Shop around for lenders: Compare offers from smaller, local lenders who provide portfolio loans, as they may offer more flexibility than larger banks.
2. Ensure you qualify: Review lender requirements for credit score, income and property type, among others.
3. Apply for the loan: Complete a loan application with your chosen lender. Be prepared to provide documentation of your income, assets and financial history.
4. Wait for approval: After submitting your application, the lender will review your financial situation. Since portfolio loans are held in-house, the approval process can be more personalized, but it might take a bit longer.
5. Consult a mortgage professional: A mortgage or home lending professional can provide personalized guidance and help you navigate different loan options to choose the one that fits your needs.

Portfolio loan requirements

Portfolio loans have unique requirements that may differ from traditional mortgages, often focusing on the borrower’s overall financial situation rather than rigid standards.

• Documentation and qualifications: Portfolio loan applicants typically need to provide income documentation (i.e., tax returns, bank statements), a detailed credit report and asset verification. Lenders may require additional documentation and consider factors like work history and the value of the property in question.
• Credit score and DTI ratio: While credit score and DTI ratio requirements are often more flexible than traditional loans, they still matter. Many portfolio lenders require a minimum credit score of around 600-650 and may accept higher DTI ratios than conventional loans.
• Loan-to-value ratio and down payment: Down payments typically range from 15% to 30%, and portfolio loans may allow higher LTV ratios than conventional loans.

In summary

Portfolio loans can be an intriguing mortgage option for borrowers. Whether you’re self-employed, looking to build credit or seeking a loan for a complex property, a portfolio loan may be right for your situation. As with most financial decisions, portfolio loans have distinct pros and cons that can influence your decision. Consider consulting with a home lending professional to help ensure you’re making a good choice for your financial future.