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Not everyone has a cookie-cutter financial situation. Fortunately, there are options available for those who may not meet the normal qualifying standards to get approved for a mortgage. One of those options is getting a portfolio loan. Read on below to learn what portfolio loans are, how they work, and what the pros and cons might be for using one to buy a home.
What is a portfolio loan?
Typically, when you’re given a mortgage, your lender does not keep your debt in-house. Instead, lenders sell most of the mortgages they grant to third parties like Fannie Mae and Freddie Mac in order to generate more funds to lend to other customers.
However, in order to be sold off, the loans must meet certain criteria set by the buyers. Most of the loans that a lender gives out will fall in line with those criteria. However, occasionally, a mortgage company will agree to underwrite a loan that falls outside of those typical qualifying standards.
Those outside-of-the-box loans are known as portfolio loans. The name comes from the fact that, in this case, rather than being sold off, the debt is kept in-house as part of the lender’s portfolio. In general, these loan products tend to be offered by smaller, community banks and credit unions.
Who might need a portfolio loan?
For the most part, buyers who can qualify for traditional financing won’t be offered the option of a portfolio loan. Instead, these loans are meant to help borrowers in situations that fall outside of the typical qualifying standards become homeowners.
Some financial situations that may require a portfolio include:
- Self-employed borrowers
- Those with poor credit scores
- Those who have gone through a bankruptcy, short sale, or foreclosure
- Those facing judgements, liens, or tax issues
- Foreign nationals
- Investors who have maxed out their traditional financing options
Pros and cons of a portfolio loan
Pros
Looser qualifying standards
The biggest benefit to a portfolio loan as the borrower is that, since the lender does not intend to sell your debt, they’re not beholden to the qualifying criteria set by those third-party buyers. Instead, they can set their own rules. Essentially, a portfolio loan may allow you to get financing that would be otherwise unavailable to you.
Closer relationship with your lender
Again, since your debt won’t be sold off, you’ll be working with the same lender for the entire life of the loan. Since you’ve already formed a relationship with them while you were buying the home, you’ll know exactly who to turn to in the event that you have a problem or a question regarding your mortgage.
Cons
The possibility of higher interest rates or fees
However, the flip side of the lender being able to set their own qualifying standards is that they’re also able to set their own rates and fees. You may be charged a higher interest rate or different fees in exchange for those looser qualifying requirements.
However, those higher rates and fees may be worth paying if you’re unable to get a mortgage otherwise. Don’t forget that you’ll still likely have the option of refinancing to a more traditional loan at a later date if you’re able to sure up your finances a bit.