If you’re looking to buy a home but can’t qualify for a traditional mortgage due to unique circumstances, portfolio loans may be the solution you need. Whether you’re self-employed, recently experienced a major life change, or struggle with credit, this alternative financing method can help make homeownership a reality. Here’s a deep dive into portfolio loans, how they work, and whether they’re the right option for you.
What is a Portfolio Loan, and How Does it Work?
Unlike traditional mortgages, where the lender sells the loan to government-sponsored enterprises (GSEs) like Fannie Mae or Freddie Mac, portfolio loans are kept by the lender. This means the loan is not subject to the stringent rules that GSE-backed loans follow. Instead, portfolio lenders create their own guidelines, which provides more flexibility to borrowers who don’t meet conventional requirements.
When you take out a portfolio loan, you follow the same basic process as with any mortgage: you apply for the loan, undergo eligibility checks, go through closing, and make monthly payments. However, the lender keeps the loan on its books, meaning it can be more willing to approve loans that would typically be denied under traditional underwriting standards.
Jennifer Beeston, senior vice president at Rate (formerly Guaranteed Rate), explains, “Since portfolio lenders keep these loans, they can create their own guidelines and often make exceptions that allow them to approve loans that would be declined under traditional rules.”
How to Get a Portfolio Loan in 4 Steps
- Find a Reputable Lender
Your first step is to research reputable portfolio loan lenders. Beeston recommends meeting with multiple loan officers to discuss options that align with your unique financial situation. Doing so helps ensure you are working with an expert who can offer the best terms. - Make Sure You Meet Eligibility Requirements
Portfolio loans are highly customizable, so eligibility requirements can vary from one lender to another. However, some general criteria include:- Credit Score: Typically, a score between 620 and 650+ is acceptable.
- Debt-to-Income Ratio (DTI): Most lenders look for a DTI of 43% or lower.
- Down Payment: A minimum down payment of 20% is common.
- Cash Reserves: Lenders often require reserves of up to 6 months of mortgage payments.
Keep in mind that, since portfolio loans carry more risk for the lender, they may come with higher interest rates and closing costs compared to conventional mortgages.
- Apply for the Mortgage
Once you have narrowed down your options, Beeston suggests getting pre-approved by your top lenders. Ensure that they provide a full underwriting process to give you a clear picture of what to expect regarding rates, fees, and other terms. - Finalize the Loan and Enter Repayment
After approval, you will go through the standard closing process, where you’ll sign paperwork, make your down payment, and officially receive your mortgage. From there, you’ll begin repaying your loan in installments.
Pros and Cons of Portfolio Loans
Like any financial product, portfolio loans come with both advantages and drawbacks. Below are some of the key pros and cons:
Pros:
- Access to Financing for Non-Traditional Borrowers: Portfolio loans are ideal for individuals who struggle to meet the criteria of conventional loans, such as the self-employed, those with poor credit, or anyone who needs a loan exceeding traditional limits.
- Custom-Tailored Terms: Because lenders make their own rules, they may be able to offer more flexibility and exceptions that make homeownership achievable.
- Building Equity: As with a traditional mortgage, a portfolio loan allows you to build equity in your home over time.
Cons:
- Higher Interest Rates and Fees: Since portfolio loans are riskier for lenders, they may come with higher rates and additional fees.
- Larger Down Payments: Many portfolio loans require a larger down payment compared to conventional loans.
- Stricter Qualification Criteria: You may still need substantial cash reserves or significant assets to qualify.
Is a Portfolio Loan Right for Me?
Portfolio loans are designed for borrowers who don’t fit the typical mold for a traditional mortgage. According to Randall Yates, co-founder of VA Loan Network, “Portfolio loans are essential for people who are often passed over by traditional lenders, such as the newly self-employed or those with poor credit.”
Additionally, Andrea “Bella” Bellony, CEO of Bellonys, suggests that portfolio loans may be the right choice for people recovering from bankruptcy or divorce, or those with substantial assets but limited verifiable income.
However, if you qualify for a conventional mortgage, it’s generally better to go with that option since conventional loans tend to be more affordable due to the lower risk for the lender.
Portfolio Loan FAQs
Are Portfolio Loans Common?
According to data from the Urban Institute, portfolio loans made up more than 31% of mortgage originations in Q3 2024. Beeston notes that the popularity of portfolio loans is expected to rise as more borrowers, such as self-employed individuals, seek alternatives to traditional mortgages.
Can I Refinance into a Portfolio Loan?
Yes, refinancing into a portfolio loan can be an option, especially if you need more flexibility in your documentation. For example, if you lack recent tax returns but can show the ability to repay through bank statements, a portfolio lender may still approve your application.
Where Can I Find Portfolio Lenders?
Portfolio lenders tend to be smaller banks, credit unions, or online banks such as Axos Bank. It may take a bit of research to find a lender that offers portfolio loans, but these smaller institutions often provide more personalized service.
Conclusion
Portfolio loans provide an excellent alternative for individuals who may struggle to qualify for traditional home loans due to unique financial circumstances. With flexible underwriting and fewer restrictions, they can be a lifeline for those looking to enter the housing market. However, it’s essential to weigh the higher costs and requirements carefully before pursuing this financing option.
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