Mortgage lenders usually issue loans, then sell them on the secondary market to minimize their risk. Selling loans also gives lenders an opportunity to issue new mortgages to other customers.
Mortgages that are sold on the secondary market are known as conforming loans. They must meet government criteria so they can be sold. Some lenders also issue portfolio loans that they keep in their investment portfolio. Since portfolio loans won’t be sold, they don’t have to meet government guidelines. That means lenders can offer borrowers more flexible terms.
What Are the Advantages of a Portfolio Loan?
If you’re having trouble qualifying for a loan through a conventional lender or agovernment agency, a portfolio loan might be the solution. You might also find that the process of getting approved for a portfolio loan is faster than the approval process for a conforming loan.
If you buy a house with a portfolio loan, the lender will manage the mortgage for the entire loan term. You’ll have an opportunity to build a long-term relationship with the company, and you might receive better customer service than you would get if you took out a conforming loan.
What Are the Drawbacks?
Portfolio loans are riskier for lenders than conforming loans. Since a financial institution doesn’t sell off a portfolio loan, it must bear the risk that the borrower might default at any time during the mortgage term.
Lenders compensate for that increased risk by charging higher interest rates and fees for portfolio loans than they do for conforming loans. If you take out a portfolio loan and you want to pay it off early, the lender might charge a prepayment penalty. A higher interest rate and fees might make a portfolio loan significantly more expensive than a conforming loan.
Is a Portfolio Loan Right for You?
A portfolio loan might be a good option if you can’t get a conforming loan because of a high debt-to-income ratio or a low credit score. If you want to buy an expensive property and the amount you need to borrow exceeds maximum amounts for a conforming loan, you might be able to buy the house with a portfolio loan.
With a conforming loan, the lender will require you to put down a minimum amount. If you don’t have that sum of money available, you might be able to take out a portfolio loan with a lower down payment and buy your dream home.
If you’re self-employed and your income fluctuates, you can have trouble getting approved for a conforming loan. You might have more success with a portfolio lender.
Where Can You Get a Portfolio Loan?
Financial institutions that offer portfolio loans are generally smaller banks and credit unions. Often, they only offer portfolio loans to existing, loyal customers. If you have a long-standing relationship with a local financial institution, you can ask if you’re eligible for a portfolio loan. A mortgage broker can help you explore your options and find the best loan available to you.
