Portfolio Loans: Understanding the Basics

By Bill Lyons | Published on May 10, 2023

Qualifying for a conventional mortgage can be challenging for many types of borrowers, including real estate investors, retirees, and small business owners. Luckily, several loan options are available for purchasing a home.

If you’re having difficulty securing a home loan, a portfolio loan might be the right option for you. Understanding how they work can help you become a homebuyer with more flexible criteria and better opportunities. But what is a portfolio loan, and how can it help you achieve your dreams of homeownership? 

Keep reading to learn more about portfolio loans, including how they work, who they’re best for, and the pros and cons. 

What Is a Portfolio Loan?

Mortgage lenders don’t usually keep the loans they originate. Instead, mortgages are frequently bought and sold to other lenders in the secondary market to allow them to free up capital and originate more loans for more borrowers. Selling a mortgage doesn’t affect a borrower or the loan terms, but you may notice the company on your mortgage statement changes from time to time. 

A portfolio loan is a type of home loan that a lender keeps instead of reselling it. These types of loans are ideal for borrowers who can’t secure a conventional loan because of stringent lending criteria. Because lenders hold onto portfolio loans instead of reselling them, they can provide more flexible requirements and terms that benefit the borrower. In addition, since the real estate portfolio loan is never resold on the market, lenders can determine their own eligibility criteria, which are often more flexible than those for traditional loans. 

How Portfolio Loans Work

Portfolio loans are similar to non-portfolio loans, and the borrower doesn’t typically notice the difference because they’re only responsible for making their mortgage payments on time. Like a conventional loan, borrowers apply, and a lender determines if they’re eligible for the loan and, if so, the amount they’re eligible for.

Since the lending eligibility criteria are at the lender’s discretion, borrowers can expect more flexible approval requirements. However, portfolio loans typically have higher interest rates and fees attached because lenders can choose their criteria. Portfolio loans benefit several types of borrowers because they don’t adhere to the strict requirements of the secondary mortgage market. Borrowers most likely to benefit from these types of home loans include:

• Those with a low credit score or high debt-to-income (DTI) ratios
• Self-employed individuals or freelancers
• Borrowers who need larger loan amounts

Portfolio Loans vs Traditional Loans

As a borrower, a portfolio loan looks similar to a traditional fixed-rate mortgage loan. Both allow you to secure funding for a home and repay the loan over time. The only significant difference between these types of loans is that the lender originates it and keeps it in their investment holdings instead of selling it to another company. 

However, traditional loans typically have strict requirements, such as minimum credit scores, debt-to-income (DTI) ratios, down payment minimums, and limits on loan amounts. Portfolio loan lending criteria are set by the lender instead of Fannie Mae or Freddie Mac, the operators of the secondary mortgage market. As a result, portfolio loan lenders may offer more flexibility to borrowers who may not qualify for a conventional loan. 

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Advantages and Risks

So what is a portfolio loan? It’s a type of home loan that a lender originates and keeps instead of reselling it, allowing them to offer more flexible lending requirements. However, it’s important to note that every lender is different, so portfolio loan requirements may vary. Still, they can offer more flexible requirements than traditional home loans, allowing more borrowers to achieve their dreams of homeownership. But like other types of loans, portfolio loans have their pros and cons. 

Advantages

The most significant advantage of a portfolio home loan is that they make homeownership easier for different types of borrowers, including self-employed individuals, business owners, and freelancers. Other advantages of these loans include the following:

• Flexible requirements: Portfolio loans may be a good option for borrowers with bad credit or a high DTI ratio. Most conventional loans require a credit score of at least 620 to qualify and a DTI of no more than 43%. If you’ve had a recent credit event that has temporarily caused a low credit score, you likely won’t qualify for a traditional mortgage. However, a portfolio loan lender may consider lower credit scores if you have consistent income and can prove your ability to repay the loan. 
• Income flexibility: With more flexible portfolio loan requirements, these loans are more accessible to individuals like investors or self-employed business owners with seasonal or variable income. 
• Larger loan amounts: There are no set loan limits, allowing you to potentially qualify for larger loan amounts. 

Risks

Like all mortgage loans, there are some risks associated with portfolio loans all borrowers should be aware of, including:

• Higher interest rates: Portfolio loans can be riskier for lenders because they don’t have the option to sell them. More risk often equates to higher interest rates to offset the risk they take on by servicing the loan. 
• Fees & penalties: Some portfolio loan lenders charge a prepayment fee that can increase the overall cost of the loan, making it difficult to pay off your mortgage early or refinance it for better terms. Additionally, lenders may charge higher fees than other types of loans. 
• Not offered by all lenders: Many lenders prefer being able to earn money by originating the loan and selling it in the secondary market, so portfolio loans aren’t offered by every home loan lender. Additionally, these loans aren’t always more flexible than conventional loans. It’s possible a lender might want to eventually sell the loan, in which case they’ll have to conform to traditional underwriting requirements. 

Qualifying for a Portfolio Loan

Portfolio loan requirements vary by the lender because they set their own lending criteria. For example, you don’t have to meet the same standards as Fannie Mae or Freddie Mac, but your lender will expect you to meet their lending requirements to secure a portfolio loan. In most cases, you can expect the following requirements: 

• Minimum credit score: Portfolio loans can benefit individuals with poor credit. However, your lender will still have a minimum credit score requirement while considering your financial situation to determine if you’re eligible for the loan. 
• Down payment: One of the perks of a portfolio loan is down payment flexibility. You can be an ideal borrower without saving money for a down payment. However, your lender will still have a down payment requirement that depends on your credit score, DTI ratio, and income. 
• Income & job history: Getting a conventional loan is much easier if you’re a W2 worker because of the strict income underwriting requirements. Unfortunately, not everyone has a W2 because they’re freelancers, business owners, or retirees. Portfolio loans make it easier to get approved for a home loan without relying on pay stubs or tax returns. However, a portfolio loan lender will still need to verify your income to ensure you have the ability to repay your debts. 

If you’re interested in learning more about portfolio loans, you’ll need to find a lender that offers them. You can ask your real estate agent if they have recommendations or contact local banks and mortgage lenders to see if they offer these types of loans. Unfortunately, many lenders don’t advertise that they offer these loans and may not offer them to everyone. You’re more likely to get a portfolio loan if you’ve built a solid relationship with your lender and have already proven you repay your debts on time. 

Portfolio loan alternatives

Portfolio loans can benefit borrowers, but high-interest rates and fees can make your loan more expensive in the long run. If you don’t qualify for a portfolio loan or want to know about other options, consider the following mortgage loans from Griffin Funding: 

• Bank statement loans: If the flexible lending requirements of a portfolio loan are appealing to you, you might consider bank statement loans that allow you to qualify for a loan using alternative methods. Instead of reviewing W2s, tax returns, and pay stubs, bank statement loan lenders will look at your bank statements to determine your ability to repay the loan. 
• Home equity loans: HELOC or home equity loans are a good option for individuals who have built up enough equity in their homes to refinance their existing mortgage. With a home equity loan, you can access cash flow and use it for anything, such as debt consolidation, home renovations, repairs, or large purchases. 
• Jumbo loans: Jumbo loans are a type of conventional mortgage that allows you to qualify for larger loan amounts, such as a luxury home or a home in a high-cost area. 
• FHA loan: If you’re a first-time home buyer, you may benefit from the FHA loan that offers more flexible lending requirements, such as lower down payments and credit scores. 

Applying for a Portfolio Loan

Portfolio loans make it possible for buyers of all types to become homeowners. However, you should understand the key differences between portfolio and non-portfolio loans to determine which is best for you. These loans typically come with higher interest rates and fees, but the lending criteria vary by lender. 

Wondering if a portfolio loan is right for you? Apply with Griffin Funding today. By answering a few simple questions, we can help you find the best mortgage option based on your unique financial situation. 

Article References

1. Eligibility Matrix. https://singlefamily.fanniemae.com/media/20786/display. 

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.