If you’re having a tough time getting home loan financing using a mortgage broker or a local mortgage lender, consider contacting a portfolio lender directly to close your mortgage.
They can offer solutions that others cannot, and may have just what you’re looking for. For example, a portfolio lender may be willing to offer you a no-down payment mortgage while others are only able to give you a loan up to 97% loan-to-value (LTV).
The same might be true if you have bad credit, a high DTI ratio, or any other number of issues that could block you from obtaining traditional mortgage financing.
What Is a Portfolio Loan?
- A home loan unique to the lender offering it
- That comes with special terms or features
- Other mortgage lenders do not offer
- It is kept on the bank’s books as opposed to being sold to investors
In short, a “portfolio loan” is one that is kept in the bank or mortgage lender’s loan portfolio, meaning it isn’t sold off on the secondary market.
By servicing the loans themselves and keeping them in portfolio, these lenders are able to take on greater amounts of risk, or finance loans that are outside the credit box because they don’t need to be resold to investors with specific underwriting guidelines.
These companies have the ability to bend the rules when they see a deal worth doing, whereas mortgage lenders that must adhere to Fannie Mae, Freddie Mac, and the FHA have very little wiggle room.
You see, most loans that are sold off are backed by Fannie and Freddie, or the FHA in the case of FHA loans, so very rigid underwriting standards must be met without exception.
Portfolio lenders, on the other hand, can create their own underwriting guidelines because they aren’t at the mercy of an outside agency if they’re actually willing (and able) to keep the loans they make.
A lot of small and mid-size lenders don’t have the same authority because they must sell their loans off on the secondary mortgage market due to liquidity constraints. And investors are becoming increasingly selective as to which loans are actually purchased.
Who Owns My Home Loan?
- Most home loans are sold shortly after origination
- So the bank that funded your loan likely won’t service it
- Look out for paperwork from a new loan servicer after your loan funds
- Unless it’s a portfolio loan
Many mortgages today are originated by one entity, such as a mortgage broker or mortgage lender, and then quickly resold to investors who earn money from the repayment of the loan over time.
Gone are the days of the neighborhood bank offering you a mortgage and expecting you to repay it over 30 years, culminating in you walking down to the branch with your final payment in hand. Well, there might be some, but it’s now the exception rather than the rule.
In fact, this is part of the reason why the mortgage crisis took place in the early 2000s. Because originators no longer kept the home loans they made, they were happy to take on more risk.
After all, if they weren’t the ones holding the loans, it didn’t matter how they performed, so long as they were underwritten based on acceptable standards. They received their commission for closing the loan, not based on loan performance.
Today, you’d be lucky to have your originating bank hold your mortgage for more than a month. And this can be frustrating, especially when determining where to send your first mortgage payment. Or when attempting to do your taxes and receiving multiple form 1098s.
This is why you have to be especially careful when you purchase a home with a mortgage or refinance your existing mortgage. The last thing you’ll want to do is miss a monthly payment right off the bat.
So keep an eye out for a loan ownership change form in the mail shortly after your mortgage closes. If your loan is sold, it will spell out the new loan servicer’s contact information, as well as when your first payment to them is due.
Portfolio Loans May Solve Your Financing Problem
- Large loan amount?
- High DTI
- Low credit score
- Recent credit event such as short sale or foreclosure
- Late mortgage payment
- Own multiple investment properties
- Need an asset-based income loan
Now back to portfolio loans. If you’re having a tough time getting approved for a mortgage, or finding a particular type of loan, consider a portfolio lender.
As noted, these types of mortgage lenders can offer things the competition can’t because they’re willing to keep the loans on their books, instead of relying on an investor to buy the loans shortly after origination.
They also offer mortgages that fall outside the guidelines of Fannie Mae, Freddie Mac, the FHA, the VA, and the USDA.
That’s why you might hear that a friend or family member was able to get their mortgage refinanced with U.S. Bank or a similar portfolio lender despite having a low credit score or a high LTV.
They may also be able to work with you if you’ve experienced a recent credit event, such as a late mortgage payment, a short sale, or a foreclosure. Really, anything that falls outside the box might be considered by one of these lenders.
Some of the largest portfolio lenders include Chase, U.S. Bank, and Wells Fargo, but there are many smaller players like Bank of Internet, BancorpSouth, Caliber Home Loans, and Wintrust Mortgage.
Portfolio Loan Rates
- Portfolio mortgage rates may be higher
- Than typical home loan rates
- Because the loan programs aren’t necessarily available everywhere
- Meaning you may pay for the added flexibility
Now let’s talk about portfolio loan mortgage rates, which as you might suspect, may not be as low as the competition.
Ultimately, many mortgages originated today are commodities because they tend to fit the same underwriting guidelines of an outside agency like Fannie, Freddie, and the FHA.
As such, the differentiating factor is often rate and closing costs, since they’re all basically selling the same thing. You may also see customer service, or in the case of Rocket Mortgage by Quicken Loans, a quirky ad campaign and some unique technology.
For portfolio lenders who offer a truly unique product, loan pricing could be entirely up to them, within what is reasonable. If the loan program is really special, and only offered by them, expect rates significantly higher than what a typical market rate might be.
If their portfolio home loan program is just slightly more flexible than what the agencies mentioned above allow, mortgage rates may be comparable or just a bit higher.
It really depends on your particular loan scenario, how risky it is, if others lenders offer similar financing, and so on.
At the end of the day, a portfolio loan is a solution that isn’t offered by every bank, so you should go into it expecting a higher rate. But if you can get the deal done, it might be a win regardless.