What Is a Portfolio Mortgage?

What Is a Portfolio Mortgage?

A portfolio mortgage, also known as a portfolio loan, is a type of mortgage a lender issues and keeps as part of its investment holdings. Portfolio mortgages are non-conforming loans, meaning they don't meet the criteria needed for resale to Fannie Mae and Freddie Mac, the government-sponsored entities that purchase most U.S. mortgages.

Because the lender doesn't sell portfolio loans to investors in the secondary market, it doesn't have to use the same eligibility criteria that traditional lenders use to qualify borrowers for conforming loans and government-backed mortgages.

This gives the lender freedom to set its own loan terms and potentially gives borrowers more options when they don't meet the eligibility criteria for a traditional loan.

Learn more: What Factors Do Mortgage Lenders Consider?

How Portfolio Mortgages Work

Because the lender keeps the loan in its portfolio, it has more flexibility in underwriting and setting terms. Some of the key features of a portfolio mortgage include:

• Held by the lender: The lender issues portfolio loans and keeps them in-house instead of selling them to investors in the secondary market.
• Flexible underwriting: The lender may offer more relaxed loan approval requirements, such as lower minimum credit scores and higher maximum debt-to-income ratios (DTIs).
• Customized loan terms: Borrowers may have more options with portfolio loans, like customized repayment terms, loan amounts and down payment options.
• Higher borrowing costs: Lenders take on more risk when they loosen credit and underwriting criteria, so they often increase interest rates and origination fees to compensate for the risk. They may also charge prepayment penalties.
• Faster approval: Lenders can often approve portfolio loans more quickly than traditional loans, which can be helpful if you're on a tight schedule.

Portfolio Mortgages vs. Conventional Mortgages

Like portfolio loans, conventional mortgages are loans not backed by the federal government. The key difference between a portfolio mortgage and a conventional mortgage is what happens to the loan after it closes. Lenders typically sell eligible conventional loans and government-backed mortgages in the secondary market, but they keep a portfolio mortgage in-house.

Here's a breakdown of the other major differences between the two:

Pros and Cons of Portfolio Mortgages

Before opting for a portfolio mortgage, take some time to carefully consider the pros and cons.

Should You Get a Portfolio Mortgage?

Because portfolio loans come with relaxed eligibility criteria, they can be a good option if you don't meet the minimum credit score or maximum DTI limits required on conventional mortgages.

These loans can also be a good option if you want to borrow a large amount or you have an unusual circumstance, such as income that's difficult to document. Freelancers and small business owners often fall into this category.

But because these mortgages often come with higher borrowing costs—including higher interest rates, larger fees and prepayment penalties—they could turn off more budget-conscious borrowers.

Other features, such as interest-only payments, can also make these loans risky. So it's important to consider your unique financial situation before choosing a portfolio mortgage.

How to Get a Portfolio Mortgage

The requirements to get a portfolio mortgage vary because the lender can set its own loan terms. If you're looking to get one of these home loans, here are general steps to follow:

1. Find a Lender

Ask for portfolio lender recommendations from people in your network, such as your real estate agent or friends and coworkers. They may have worked with one in the past or have connections within the industry. You can also do an online search for portfolio lenders in your area. Smaller banks, credit unions and online lenders are more likely to offer these loans than large traditional banks.

Working with a mortgage broker can also be a good option, since they're trained to find a mortgage that fits your needs best.

Learn more: How to Shop for a Mortgage

2. Apply for Preapproval

Once you've found a portfolio lender you'd like to work with, ask for a preapproval letter. This type of document estimates your loan amount, interest rate and down payment.

Each lender's process may vary because these loans aren't standard. For example, the lender may run a credit check, verify your employment and review your financial statements.

Getting the preapproval can help you determine details like your eligibility, whether you'd like to work with the lender and the terms you may receive. Keep in mind that a preapproval can ding your credit score by a couple points temporarily due to the hard inquiry when checking your credit report.

Learn more: How Long Does a Mortgage Preapproval Letter Last?

3. Negotiate Terms

You can negotiate the details of your loan, such as your interest rate, down payment or closing costs. Having written preapprovals from a few lenders can help. If one lender offers a lower interest rate or has a lower down payment requirement, for example, you can send the letter to another lender and ask them to match or beat the offer.

Mention any strengths from your application, such as high income or good credit, and use it to offset a weaker area, such as a small down payment.

4. Complete Underwriting and Approval

The process of getting a portfolio loan is similar to applying for a traditional mortgage. You'll typically hand over paperwork to document your income, assets for the down payment and employment. Some lenders may waive certain document requirements based on the type of portfolio loan you're getting.

The lender may also order an appraisal to verify the property value.

Once the lender completes the underwriting process and approves your application, you'll sign the loan documents and move into your new home.

Alternatives to a Portfolio Mortgage

If getting a portfolio mortgage isn't an option, or you're nervous about the higher cost, you can consider the following alternatives:

• Conventional loans: Conventional mortgages are widely available and come with low down payment requirements and lower borrowing costs compared to portfolio loans.
• FHA loans: These mortgages are backed by the Federal Housing Administration. You may be able to qualify for an FHA loan with low credit scores, as long as you meet the down payment requirements.
• VA loans: A VA loan is a mortgage that's guaranteed by the U.S. Department of Veterans Affairs. VA loans have no specific loan limits and don't require a down payment. Lenders typically require a credit score of 620 or above, however.

The Bottom Line

A portfolio mortgage might be a good option if you can afford to buy a home but you don't meet some of the eligibility criteria that come with a traditional home loan. For instance, you might lack income documentation, have minimal credit history or lack the funds needed for a down payment. Portfolio loans might come with higher borrowing costs, though, so be sure to read your loan agreement if you decide to get one.

Whichever type of mortgage you're seeking, you'll want to have a clear idea where your credit stands well before the process begins. You can check your Experian credit report and FICO^® Score^☉ for free. You may be able to qualify for a conventional loan by taking steps to improve your credit.