When you think of a mortgage, you likely think of conventional loans. These loans are written and funded by a lender, but then sold to a secondary market entity, such as Fannie Mae or Freddie Mac. Your loan servicer might remain the same, but the entity that actually owns the loan doesn’t remain the same. Typically, whether it’s a few months or a few years down the road, your loan gets sold to another service. This may happen several times during the loan’s term.
A portfolio loan is the opposite of this. When a lender writes a portfolio loan, they add your loan to their own portfolio. This means they keep your loan. They service it and own it. You only deal with the lender that originated your loan, unless of course, your loan gets sold down the road.
There are a few benefits of the portfolio loan that you should understand.
Smaller Lenders are Portfolio Lenders
You probably won’t find portfolio loans at your big-name banks that you find around the country. Instead, you’ll find them with your smaller, community banks. Think of the banks that exist only in your town or in your state. These are the banks that may have these loan programs.
These lenders get to know the people of the community and their financial needs. This may prompt the bank to come up with a loan program that may solve your financial issues. This may include providing loans that other ‘big banks’ will not offer. You benefit from dealing with a smaller bank because you get more personal attention. You aren’t just a number along with the thousands of other clients that bank handles. You are a real person with real financial needs that the bank is trying to help.
Portfolio Loans are for Risky Borrowers
Let’s face it, not everyone is suited for a Fannie Mae loan. Not every borrower has great credit, low debt ratios, and stable income. Some borrowers come to the table with risky factors. Maybe they had a financial issue in the past and now they have a low credit score. Other borrowers may have credit scores that breach the maximum ratio allowed or they have income that isn’t what you would call steady. Conventional and even government-backed lenders may shy away from these borrowers. That’s when portfolio lenders come in handy.
Portfolio lenders make up their own rules for their loans. They don’t have a secondary market they have to answer to, so they can take any type of risk they like. This doesn’t mean that there aren’t any rules because there will be plenty of them, they just may be different than the ‘standard loans.’
A few examples of borrowers that do well with portfolio loans include self-employed borrowers, those with low credit scores, borrowers looking to buy investment homes, and borrowers with judgments or collections on their credit report. If you are a ‘risky’ borrower, you may benefit from the portfolio loan options you have at your disposal.
You Get More Chances
When it comes down to it, a portfolio loan gives you chances that other loans won’t provide. If you don’t fit the mold of a conventional loan or you don’t meet the requirements for an FHA loan because you aren’t buying an owner-occupied property, you’ll get more chances with a portfolio loan.
This isn’t to say that the first loan you come across is going to be the one that fits your needs. You may come across many portfolio loans that just aren’t fitting the mold. This is why you have to keep shopping around. Eventually, you’ll find that lender that has the program that fits you perfectly. Whether you need a lender that will take a chance on a lower credit score, a higher debt ratio, or that doesn’t mind that you are buying your fifth investment property, you’ll find the one you need if you shop around.
Portfolio loans are great for borrowers that aren’t ‘perfect.’ Yes, you may pay slightly higher interest rates or pay more closing fees, but if you get the loan you need, it may be worth it in the end. As you should with any loan, make sure you shop around. See what each lender has to offer and determine how it fits into your financial picture. Only then will you be able to decide which loan is right for you.