Portfolio Loans & Portfolio Lenders: A Complete Guide
What You Should Know
- Portfolio loans are not sold to secondary markets. Lenders keep them until maturity.
- They don’t need to meet conforming loan guidelines.
- Lenders have more flexibility to adjust loan terms for borrowers.
- However, they have higher interest rates and fees than conforming loans.
6.49%-11.49%
A portfolio loan is a mortgage that is not sold onto the secondary market. Instead, lenders keep the mortgage on their balance sheet. As a result, portfolio lenders have more flexibility in approving mortgage applicants. Portfolio loans are best for borrowers meeting the following criteria:
- Self-employed individuals or those with complex income sources.
- Borrowers with low credit scores or a recent bankruptcy.
- Borrowers seeking a jumbo loan (loans above the county conforming loan limit).
- Non-U.S. citizens or foreign nationals purchasing property in the U.S.
However, portfolio lenders may charge higher interest rates or require a larger down payment. This compensates for the increased risk and opportunity cost of not freeing up cash to originate more mortgages. This article will thoroughly explain portfolio loans and their pros and cons. The second part will discuss the most popular portfolio lenders and alternatives to the loan.
Portfolio Loan Fact Sheet
What Is a Portfolio Loan?
A portfolio loan is a type of mortgage that isn't sold onto the secondary market. In contrast, conventional loans are sold to investors through government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. Most mortgage lenders resell their loans to these GSEs to free up cash and continue underwriting loans.
Fannie Mae and Freddie Mac will buy mortgage assets if they meet minimum criteria. These criteria are known as conforming loan requirements. Most lenders attempt to originate conforming loans because they can quickly flip the investment to a GSE who is happy to buy it.
Loans that don't meet GSE criteria are known as non-qualifying mortgages or non-QM loans. As a result, many portfolio lenders offer unique characteristics such as interest-only payments.
The difference with portfolio lenders is that they aren't required to meet conforming loan requirements. However, many use it as a rule of thumb and adjust the rules as necessary. In most cases, lenders are willing to offer portfolio loans to their top clients.
Conforming Loan Requirements
If a mortgage meets conforming loan requirements, a lender can resell it to Fannie Mae or Freddie Mac. Many lenders will decline mortgage applicants if they don't meet the criteria. While portfolio lenders use the requirements as a guideline, they can adjust the rules. The conforming loan requirements are as follows:
- $647,200 to $1,456,200 standard loan limit
- 97% maximum loan-to-value (LTV) ratio
- 50% maximum debt-to-income (DTI) ratio
- 620 minimum credit score
- Homebuyer education course for first-time home buyers
Advantages & Disadvantages of Portfolio Loans
Overall, portfolio loans can be more expensive and time-consuming but offer more flexibility for borrowers who may not qualify for conventional loans. It's essential to weigh the pros and cons before deciding if a portfolio loan is the best option for you. It's a good idea to speak with a lender who offers portfolio loans and discuss your options.
| Advantages | Disadvantages |
|
|
|---|
Advantages
One advantage of portfolio loans is that they offer more flexibility for borrowers. Portfolio lenders often look at the overall picture of a borrower's financial health instead of strictly adhering to conforming loan guidelines. As a result, they can approve self-employed and foreign borrowers or those with lower credit scores and recent bankruptcies.
Furthermore, portfolio lenders have more opportunities to provide unique features unavailable to conforming borrowers. For example, borrowers can receive DSCR loans, interest-only, and reverse mortgages. To fully understand the features available, you can review our guide on Non-QM loans.
Disadvantages
On the downside, portfolio loans often have higher interest rates and more significant down payment requirements. This is because the lender risks more and loses out on other mortgages if they use their cash for this one.
Portfolio loans require more paperwork and can have longer processing times than conventional loans. This is because portfolio lenders take a comprehensive approach to reviewing a borrower's financial situation instead of relying on conforming guidelines.
Lenders try to profit from portfolio loans through higher origination fees. With conventional loans, the government strictly regulates the fees that come with originating. However, portfolio loans are not as regulated, which opens up an opportunity for lenders to charge higher fees.
Tip: Qualifying for a Portfolio Loan
Qualifying can vary depending on the lender. As mentioned earlier, many will use conforming loan guidelines as a basis for their decision-making process. However, they may be willing to overlook specific requirements if a borrower has solid financial health. Financial health is defined as a low debt-to-income ratio, solid credit score, down payment funds, and verifiable income.
Popular Portfolio Lenders
Some popular portfolio lenders include Axost, FNBA, and Citadel Servicing Corporation. These portfolio lenders offer various non-QM loan options, including jumbo loans and foreign national mortgages. Shopping around and comparing rates and terms before deciding on a lender is essential.
Axos Bank
Axos Bank offers portfolio loans ranging from $500,000 to $30 million. Aside from underwriting flexibility, the lender provides interest-only options and minimal down payments through cross-collateralization.
First National Bank of America
FNBA has over 60 years of non-QM portfolio lending experience. They offer portfolio loans in all 50 states with LTVs ranging from 95% to 65%. Additionally, they have DTIs ranging from 43% to 55%.
Citadel Servicing
In August 2019, Citadel Servicing announced to be managing over $3 billion in loans. While not licensed in every state, they offer portfolio loans and other Non-QM products. Citadel is partnered with Acra Lending, which is the consumer-facing origination channel.
Ocean Lending
Ocean lending is a portfolio lender with many services. Their products range from private portfolio loans to VA mortgages. Their portfolio loans are for people who have had a recent credit event and require a minimum credit score of only 500. They also offer hard money loans.
Alternatives to Portfolio Loans
Portfolio loans are a popular way to receive financing when a borrower does not qualify for another type of loan. Portfolio loans tend to have a higher interest rate than other loans because they tend to be riskier. A higher interest rate means a borrower has to pay more for their loan over time.
Unless a borrower wants non-QM features, they should ensure that less expensive mortgage options are unavailable. The following list provides information about alternatives a borrower should consider before getting a portfolio loan.
| Down Payment | Credit Score | Debt to Income | |
|---|---|---|---|
| FHA Loan | 3.5% to 10% | 500 to 580 | 43% |
| USDA Loan | 0% | N/A | 41% |
| VA Loan | 0% | N/A | 41% |
| Conforming Loans | 3% | 620 | 50% |
| Conventional Loans | 5% | 620 | 50% |
FHA Loans
An FHA loan is a mortgage loan that the Federal Housing Administration backs. These loans tend to have a lower interest rate than conventional ones because they are insured by the government agency, making them less risky for the lenders. FHA loans have specific requirements that a borrower must meet to qualify. These requirements include the following:
- Credit score of 500+
- Debt-to-income ratio (DTI) of less than 43%
- The purchased home must be the primary residence
- Proof of employment required
If borrowers satisfy all the requirements, they will likely get accepted for this loan. If they can't get approved, the borrower should consider getting other loans discussed below.
USDA Loans
Just like FHA loans, USDA loans are insured by a government agency. The U.S. Department of Agriculture backs USDA loans issued to qualifying individuals looking to purchase a property in a rural area of the USA. USDA loans also have specific requirements that a borrower must meet to qualify. Some of the requirements include the following:
- Valid U.S. citizenship
- Area population of fewer than 20,000 people
- The purchased home must be a primary residence
- Household income of less than 115% of the area's median income
- Debt-to-income ratio (DTI) of less than 41%
USDA loans are attractive because they have a low interest rate and a down payment of 0%. This means that a borrower may be able to put down 0% when getting a loan.
Even though it is a desirable financing option, it has strict requirements and restrictions on where you can purchase a property. This means that many people will not be able to apply for this type of loan due to tight regulations.
VA Loans
Another government-backed mortgage loan is a VA loan. The Department of Veteran Affairs secures this mortgage and provides mortgage assistance to qualifying veterans and service members. Apart from being a qualifying veteran or a serviceman, there is a list of other requirements a borrower must meet:
- Credit score of at least 620
- Debt-to-income ratio (DTI) of less than 41%
VA loans have attractive perks, such as low interest rates and down payments. In some cases, VA loan borrowers may be able to put down as little as 0% for their mortgage. Like any other loan listed above, a VA loan has strict limitations that restrict access to the loan for many people.
The most significant restriction imposed is that the borrower must be a serviceman or a veteran, which means that only a small number of people would be able to apply.
Conforming Loans
There are quasi-government agencies that also have specific mortgage programs for people. Fannie Mae and Freddie Mac provide low-cost loans for low to moderate-income households. These loans are called conforming because they conform to particular standards.
A conforming loan is a conventional loan sold to an agency if it meets all the requirements. Some of the most common conditions for conforming loans include the following:
- Base loan limit of $647,200
- Loan-to-value (LTV) ratio must not be greater than 97%
- Household income of less than 80% of the area's median income
- Debt-to-income ratio (DTI) of less than 45%
These loans specifically target low to moderate-income households struggling to purchase a property for financial reasons. Conforming loans tend to have a lower interest rate than conventional loans because they are backed by one of the agencies.
Conventional Loans
Conventional loans are the most popular type because no government agency backs them. These loans are more unrestricted than the other loans mentioned above, but a borrower may still need help to get them if they cannot meet the requirements.
It is important to note that some requirements for conventional loans may be stricter than other loans. Still, conventional loans are available to everyone regardless of income, property location, cost, etc. Typical requirements for conventional loans include:
- Down payment of at least 5%
- Credit score of at least 620
- Debt-to-income (DTI) ratio of less than 50%
USDA loans are attractive because they have a low interest rate and a down payment of 0%. This means that a borrower may be able to put down 0% when getting a loan.
In addition to these requirements, a lender may screen candidates based on their income, loan term, and purchase price. If a borrower does not qualify for any backed loan, they should try to apply for a conventional loan before applying for a portfolio loan because it may be cheaper. A borrower should try to shop for a good portfolio loan deal if none of the above options are available.