By Matt Allen
Vice President, Portfolio Lending (NMLS #415037);

How Do Portfolio Loans Work?

May 19, 2020

  • Mortgages
  • Portfolio Loans
  • Non-conforming Loans

While most people dream of one day owning their own home, past financial troubles can make that goal more difficult to obtain. However, portfolio mortgages are a viable loan option for borrowers who don’t have perfect credit or who fall outside conforming loan guidelines. 

Often, mortgage lenders sell the loans they originate to another lender or government entity, such as Fannie Mae, to generate funds to lend to others. However, these buyers require the loans meet specific guidelines.

Some loans, however, aren’t sold but are kept and serviced by a lender. These type of loans are called portfolio loans, and they typically have more flexible lending guidelines. 

Why consider a portfolio loan?

For borrowers who do not meet the criteria required for a conventional mortgage loan, portfolio loans can be a more flexible option. Borrowers who fall into that category include:

  • Borrowers who have experienced financial hardships in the past. A foreclosure or bankruptcy in your past can make it very difficult to obtain financing. A portfolio loan can be a potential option if you have faced judgments, liens, or tax issues. Conventional mortgage loans also have credit score minimums that may not be feasible for you due to your previous financial situation.
  • Unique borrowers such as foreign nationals, self-employed borrowers, those with no documented income, or who have high net worth. The underwriting guidelines of a traditional mortgage loan require documented proof of income to qualify. Foreign nationals looking to purchase a home in the U.S. likely don't have an established history of credit or a credit score to qualify for a mortgage. Borrowers in these situations can turn to a portfolio loan.

Portfolio Loan Differences

Interest rate

A portfolio loan presents a higher risk for a lender as they’re not able to sell the loan to other lenders. To offset the higher risk, loan rates are often slightly higher than government-backed loans. Additionally, the minimum down payment amount required for a portfolio loan could be 10% to 30% higher.

Closing costs

Closing costs on a portfolio loan may include additional fees or higher charges. They are generally 3% to 4% higher than traditional mortgage closing costs. Before considering a portfolio loan, it’s important to be aware these additional costs. 

Just like with other mortgage loans, you should do your research to make sure that a portfolio loan is your best option for financing a new home. Since lenders can set their rates and criteria with a portfolio loan, be sure to vet several lenders to ensure you get the best possible terms.

If you would like to see if a portfolio loan is right for your situation, give the experts at NASB a call at 855-465-0753.