If you’ve been unable to get approved for a traditional refinance because of a low credit score, a high debt-to-income ratio, or another reason, a portfolio loan is another option. You might have a better chance of qualifying, but it will also cost you more.
What are Portfolio Loans?
Lenders typically issue mortgages, then sell them to institutions like Fannie Mae or Freddie Mac. That gives lenders the assets and flexibility they need to issue more loans. Borrowers must meet specific eligibility requirements for mortgages that are sold on the secondary market.
Portfolio loans are not resold. Instead, lenders keep them in their portfolios and service the loans themselves. Since portfolio loans aren’t resold, lenders can approve borrowers whose credit scores or debt-to-income ratios would make them ineligible for traditional loans.
That extra flexibility is beneficial for borrowers with poor credit, but it comes at a cost. Because they’re taking on additional risk, lenders that issue portfolio loans charge higher interest rates and fees.
How Can You Find a Lender That Offers Portfolio Loans?
Portfolio loans can be hard to find. Institutions that offer them are generally small, local banks and credit unions. Lenders typically don’t advertise portfolio loans and only offer them to current or past customers.
If you’re interested in refinancing with a portfolio loan, you can start by contacting your current lender to find out if it offers them. You can also reach out to other financial institutions you’ve done business with and ask if they issue portfolio loans.
Is Refinancing With a Portfolio Loan the Best Option for You?
You might find a handful of institutions that offer portfolio loans. If so, submit applications to each of them and compare the terms that you’re offered.
Refinancing with a portfolio loan will only make sense if it will save you money. Consider your current interest rate and monthly payments and the number of years left on your loan, and compare that to the terms of a potential refinance. If the interest rate you were offered isn’t much lower than your current rate, or if the upfront fees are high, you might not save enough money to make refinancing worthwhile.
Figure out how long it would take you to break even and how much longer you’ll continue to live in your house. If you would move before you would save enough to offset your upfront fees, refinancing won’t make financial sense. If you intend to stay put for a long time, refinancing with a portfolio loan can be a smart move.
It might be better to put off refinancing and focus instead on improving your credit. If you spend the next several months reducing your credit card balances, you might be able to qualify for a traditional refinance with more favorable terms than a portfolio loan.
