Portfolio loans are pretty much what they sound like. A lender who loans money to a borrower and keeps the debt on their portfolio to earn consistent interest on the loan. It’s not sold to other lenders. In contrast, conventional loans are issued by lenders but are then sold to another lender who will service the loan. If you have ever closed on a loan you know that the first couple of payments are to the mortgage lender that closed your home. After a couple months you will get a letter saying your loan will be serviced by another lender.
Portfolio lenders are usually not large lenders like Chase and Wells Fargo. It is smaller banks and credit unions that offer portfolio loans in many cases. They are for people who have bad credit, bankruptcies, foreclosures, tax liens, or student loan debt and cannot qualify for a conventional mortgage.
Who are Portfolio Loans for
Portfolio loans are more about the person than the numbers. Let’s face it, bad things can happen to good people. Because of this, having a low credit score or a foreclosure is not something that will automatically disqualify you. They will want to know more about the person, what caused the credit issues or bankruptcy, and how you’ve recovered. Most people seek a portfolio loan because of poor credit scores, self employed, or had a recent bankruptcy or foreclosure.
Situations in which a portfolio loan is a good option:
- Bad credit scores
- Self-Employed borrowers
- Recent Bankruptcy
- Foreclosure or short sale
- Tax issues
- Judgements and Leins
- Foreign nationals
- High income low credit
- Second mortgages
- No doc income but high net worth
- Flip property
Properties that do not qualify for a conventional loan
Another reason to seek a portfolio loan is when you want to purchase a property that does not meet conventional or FHA property guidelines. The house may need a lot of repairs and doesn’t qualify for conventional or FHA loans. If you are wanting to buy a condo with an FHA loan, the condo must be FHA approved. If it isn’t, and you do not qualify for a conventional loan then a portfolio loan may be a good option.
A property may not be eligible for traditional financing:
- Electrical issues or exposed wiring
- Roof needs to be replaced
- Water damage
- Missing fixtures
- No appliances
- Damaged flooring
- Non-compliant updates
- Cracks in foundation
Portfolio Loan Costs
The reason portfolio loans make sense is because they allow you to buy a home before home prices increase. The interest rates on portfolio loans are higher than current market rates. They also come with high closing costs and fees. However, you can always refinance out of the loan into a more traditional mortgage when you’re able to improve your situation. There will be significant up-front costs associated with portfolio loans. A low downpayment is out of these question. The lender will want to have an equity stake in the property in the event you default on the loan. Usually a downpayment of at least 10%-25% is needed.
Up-front portfolio loan costs
- Closing costs
- Origination fees
Portfolio loan requirements
- Can use for new purchases and refinances
- 10% downpayment minimum
- Part of the downpayment can be a gift
- Must proof of income (W2’s, bank states, tax returns)