An In-Depth Guide to Portfolio Loan Interest Rates and Terms
If you’ve ever been worried about not qualifying for a conventional home loan, you’re not alone. Luckily, there are options out there for those who can’t qualify because of factors like non-traditional income and a less-than-ideal credit score. Portfolio loans are built with the flexibility that conventional loans simply can’t offer. As the second most popular loan type with 23.7% of mortgage origination consisting of portfolio loans, they give many borrowers a lifeline and provide an opportunity to achieve their homeownership dreams.
In this article, we’ll be exploring everything you need to know about portfolio loans, including their interest rates and terms. Keep reading to find out if portfolio loans are right for you!
What is a Portfolio Loan?
A portfolio loan is a type of mortgage that is kept in the lender’s investment portfolio rather than selling it on the secondary mortgage market. Since these loans are kept on the lender’s books, they aren’t required to follow a strict set of rules or criteria for evaluating borrowers. Instead, the lender has the flexibility to set their own standards, allowing them to consider a broader range of factors. This makes it possible for those who can’t qualify for a traditional mortgage to get a portfolio loan.
Additionally, a portfolio loan is an umbrella term and can encompass different loan types. For example, both a foreign national loan and a DSCR loan may be considered portfolio loans IF the lender retains them on their books. Because of the flexibility they offer, portfolio loans tend to offer terms and conditions that are tailored to a borrower’s needs.
How Do Portfolio Loans Work?
From a borrower’s perspective, the loan process can be fairly similar to getting a conventional mortgage. You apply for the loan, get approved, and borrow a predetermined amount of money to finance your dream home. In exchange, you’re required to pay the lender in monthly installments to typically cover principal and interest payments to pay down the loan. The main differences you may notice as a borrower throughout this process are the qualification requirements, interest rates, and loan terms, which we’ll be covering more in detail later on in this article.
But on the lender’s side, it’s slightly different. With portfolio loans, lenders who offer them have to manage and service these loans themselves since they retain them as part of their portfolio. On top of that, lenders who offer portfolio loans are ultimately assuming more risk by holding onto these loans. This means that if a borrower defaults on the mortgage, it will be the lender’s responsibility to try to recover as much of the outstanding balance as possible since they will face the consequences of the loss.
Lenders who offer portfolio loans can set their own guidelines for credit scores, income documentation, loan-to-value ratios, and other factors, making it easier for borrowers with non-traditional financial profiles to qualify.
Who Could Benefit From a Portfolio Loan?
Portfolios can be beneficial to a wide variety of borrowers, especially those who have difficulties qualifying for a traditional loan. This could include, but is not limited to:
- Self-employed individuals
- Gig workers
- Freelancers
- Real estate investors
- Business owners
- Retirees
- High-net-worth individuals with no documented income
- Foreign nationals
- Individuals with credit challenges
- Individuals with a high debt-to-income (DTI) ratio
- Individuals looking for flexible terms
- Individuals with unique properties
- Individuals with unique financial situations
Portfolio Loans vs. Conventional Mortgages: What’s the Difference?
When a borrower gets a conventional mortgage, they’re usually originated by the lenders and then sold to government-sponsored entities (GSEs) like Fannie Mae or Freddie Mac on the secondary market. Because these loans are sold off, they have to follow strict guidelines and standards set by these GSEs, including credit score requirements, debt-to-income ratios (DTI), loan limits, income verification requirements and others. Having these stringent qualification requirements in place makes it difficult for borrowers who don’t fit the criteria exactly to qualify for a loan.
Unlike conventional mortgages that follow a one-size-fits-all approach, portfolio loans offer much more flexibility for borrowers who fall outside the standard mold. Think of it this way – a conventional mortgage is like a pre-fab house with set specifications, while a portfolio loan is a custom-built home that’s designed to your liking. There are several key differences between the two:
- Loan Source: Conventional loans are sold to GSEs, which frees up capital for lenders, while portfolio loans are retained by the originating lender.
- Qualification Criteria: Conventional loans rely heavily on credit scores and income verification. In contrast, portfolio lenders typically consider a wider range of factors like alternative income sources to make them more accessible to those who can’t qualify for a conventional loan.
- Loan Terms: Conventional loans have standardized terms set by Fannie Mae and Freddie Mac. Portfolio loan terms can be tailored by the lender to fit the borrower’s unique situation.
- Availability: Conventional loans are widely available and can be found at most if not all, traditional banks and credit unions. Meanwhile, portfolio loans are less common and are typically only offered by private lenders and local banks.
Ultimately, these differences mean that portfolio loans are non-conforming loans, meaning they don’t follow the criteria set by the FHFA, and also non-qualified mortgages (non-QM), meaning they don’t follow the standards set by the CFPB.
Qualification Requirements for Portfolio Loans
Since portfolio loans are more flexible and customizable than conventional loans, the qualification requirements will vary depending on the lender who offers them, and the type of portfolio loan. While portfolio loans can benefit those with non-traditional income or poor credit, you will still need to meet the lender’s qualification requirements to be eligible for a loan.
Generally, you can expect to have to meet minimum credit score, down payment, and income history requirements. On top of that, different types of portfolio loans may have specific requirements you’ll need to consider.
For example, if you plan to get a bank statement loan, you’ll have to provide the lender with a certain number of months’ worth of bank statements (typically 12 to 24 months).
If you’re considering getting a portfolio loan, research loan types that may suit you and the different lenders that offer them as not all lenders do. Once you have a shortlist of lenders that you’re interested in, reach out to them directly to ask them for their qualification requirements. From there, you’ll have the most accurate qualification requirement information and can determine which ones you may be able to qualify for.
Portfolio Loan Interest Rates
Interest rates for portfolio loans will vary based on several factors, like the lender, the loan type, your borrower profile, and the current market. Most portfolio loans have similar features as a traditional mortgage, such as a 30-year fixed interest rate reflecting the borrower’s profile and creditworthiness.
However, it’s important to note that portfolio loans typically have slightly higher interest rates than conventional or government-backed loans. Despite having higher interest rates, portfolio loans open up the door to homeownership for borrowers who could not otherwise qualify.
Portfolio Loan Terms and Fees
Portfolio loan terms and fees can vary significantly between lenders who offer them, but most lenders who provide these options structure their terms and fees similarly to traditional mortgages. When it comes to payment terms, many lenders offer either 15-year or 30-year terms for their portfolio loans. Fees will vary by lender, but you can expect to pay a certain percentage towards the origination fee, which is typically no more than 5% of the loan amount. These fees may be negotiable depending on the flexibility of the lender and your borrower profile.
Beyond the loan terms and origination fees, you should also consider additional terms and costs such as the down payment, prepayment penalties, an assumption clause, and the grace period for any missed payments. These are all factors that you should carefully consider before agreeing to any home loan.
Types of Portfolio Loans
While it can be easy to think of portfolio loans as simply one type of loan, the reality is that the term “portfolio loans” is an umbrella term for a wide variety of loans. Remember that portfolio loans were not built to be a one-size-fits-all solution, leading lenders to create even more specialized lending options to suit many different kinds of borrowers. Below, we’ve listed some of the most popular types of portfolio loans that you can find on the market:
- Bank Statement Loans: A bank statement loan is for self-employed individuals who may have difficulty proving their income through traditional income documents, like tax returns. It’s common for self-employed individuals to write off all of their business expenses for the year on their tax returns, making their adjusted gross income (AGI) look too low to qualify for a traditional loan. Using bank statements instead, the lender can get a more accurate picture of the borrower’s income by calculating an average monthly deposit amount.
- Profit & Loss (P&L) Loans: For business owners who want to qualify for a mortgage using their business income, P&L loans are the perfect fit. Instead of using bank statements, lenders will evaluate the business’s P&L statements to determine the borrower’s ability to repay the loan.
- Asset Depletion Loans: An asset depletion loan is a mortgage option for high-net-worth individuals who have little to no documented income. Rather than using income to qualify for a mortgage, lenders look at the individual’s liquid assets and divide that value by the number of months in the loan term. The lender then considers this amount to gauge a borrower’s ability to repay the loan. It’s called an “asset depletion” loan since the idea is to “deplete” your liquid assets throughout the life of the loan.
- Foreign National Loans: As a foreign national, it can be nearly impossible to qualify for a home loan in the US without an SSN or credit score. Due to residency status, foreign nationals cannot qualify for a conventional or government-backed loan. Specialized lenders offer foreign national loans as a solution to this problem and provide non-US citizens an opportunity to tap into the US real estate market.
- ITIN Loans: ITIN loans were created to help immigrants who have an ITIN instead of an SSN to qualify for a home loan. Similarly to foreign nationals, ITIN holders cannot qualify for a conventional or government-backed loan because of their residency status. Recognizing that this is an underserved portion of the mortgage market, specialized lenders have created the ITIN loan to provide an alternative path to homeownership that might not otherwise be possible.
Pros and Cons of Portfolio Loans
Pros:
- More flexible qualification requirements
- Traditional income documents (e.g. W2s, pay stubs, tax returns) are usually not required
- Possibility of getting approved with a recent bankruptcy, foreclosure, or short sale
- Typically quicker approval process
- More customized terms for borrowers
- Financing options for unique properties
- Potential for negotiation on interest rates and terms compared to conventional loans
Cons:
- Can have slightly higher interest rates
- Terms and guidelines can vary widely
- Limited availability
- Potentially higher origination fees and closing costs depending on the lender
How to Get a Portfolio Loan
If you think a portfolio loan is right for you, but don’t know how you can get one, here is a rough step-by-step process of what you can expect:
1. Determine Your Needs and Eligibility
Start by understanding your borrowing needs and determine what type of property you wish to finance, along with how much you may need. Evaluate your eligibility by considering your credit score and income sources. Depending on your situation, certain portfolio loan types may be more suitable than others.
2. Research and Find Suitable Portfolio Lenders
Portfolio lenders may be more difficult to find than traditional lenders as they’re less common. Do your research to find portfolio lenders that service your area and might be a good fit. Make sure to identify a lender who is licensed in the state in which you are looking to purchase or refinance. Compare loan options and terms between different lenders to narrow down your list of potential lenders.
3. Gather Your Documentation
Prepare any documents you may need to provide to the lender for a pre-approval. This could include:
- Bank statements
- Tax returns (if applicable)
- Asset verification
- Employment verification
- And more depending on what the lender requires.
Keep in mind that these are the documents that the underwriters will be reviewing when evaluating your ability to repay, so it’s important to have everything organized and ready.
4. Get a Pre-Approval
Getting a pre-approval shows sellers that you’re a serious buyer. On top of that, a pre-approval will give you a better idea of how much you can afford by providing a maximum loan amount and interest rate. This can help you narrow down your options during your home search and ensure you don’t exceed your budget.
5. Submit a Formal Application
Once you’ve picked out a property and an offer has been accepted, a formal application will have to be submitted to the lender. This is where the documents you’ve collected will come in handy. The lender will also ask you to provide detailed information regarding your financials, employment history, credit history, and the property you’re financing.
6. Underwriting Process
At this point in the process, the lender will thoroughly review your application and documents to assess your eligibility. A property appraisal may be ordered at this stage to gauge the property’s value in relation to the loan amount.
7. Loan Approval and Closing
Congratulations! Your loan has been approved. The lender will provide you with a loan commitment that outlines the terms and conditions of the loan. The closing day will be scheduled and at closing, expect to review and sign all documents, pay closing costs and fees, and provide the down payment.
Portfolio Loans for Rental or Investment Properties
If you’re a real estate investor, you may be wondering if portfolio loans are available for rental or investment properties. The answer is: yes, they are available! While not all lenders offer them, they’re available from certain specialized lenders.
Depending on the lender, they may even have loans that are tailored specifically to real estate investors. For example, some lenders may offer DSCR loans as a portfolio loan, which considers the property’s rental income in place of the borrower’s income. Real estate investors can benefit from these customized loan terms to maximize their cash flow and investment returns. At Defy Mortgage, we offer DSCR loans, fix-and-flip, and construction loans to cover a broad range of needs for real estate investors.
FAQs:
- What is a portfolio loan?
A portfolio loan is a type of mortgage that the lender keeps in their own investment portfolio, rather than selling it on the secondary mortgage market. Since the lender assumes all of the risk, they can offer more flexible qualification requirements.
- Who should get a portfolio loan?
Portfolio loans are ideal for borrowers who might not qualify for conventional loans. This could be for a variety of reasons, such as a lower credit score, self-employment, real estate investor status, complex income sources, or a high DTI ratio.
- Where can I get a portfolio loan?
Portfolio loans are typically offered by private lenders, some credit unions and local banks.
- What are the pros and cons of a portfolio loan?
Pros:
- More flexible qualification requirements
- Customized loan terms
- Typically faster approval process
- Potentially larger loan amounts
- Provides an alternative path to homeownership for those who could not qualify otherwise
Cons:
- More limited lender options
- Potentially higher interest rate
- Potentially higher closing costs
- Are portfolio loans assumable?
Portfolio loans can be assumable, but it depends on the loan terms set by the lender. Some portfolio loans allow assumption with lender approval, while some don’t. It’s important to verify this information with your lender before accepting a loan agreement.
- Do you need a down payment for a portfolio loan?
Yes, you typically need a down payment for a portfolio loan.
- How much of a down payment do you need for a portfolio loan?
The down payment required for a portfolio loan varies depending on the lender and several different factors. Generally, you can expect to put down 10% to 30% for a portfolio loan.
- What are the interest rates for portfolio loans?
Portfolio loan interest rates can vary depending on the lender and other factors, including current market conditions. Since the lender assumes all risk with portfolio loans, you can expect interest rates to be slightly higher than conventional rates. However, this is a small price to pay for a chance at building your wealth through homeownership.
- What’s the difference between portfolio loans and conventional loans?
The main difference is that portfolio loans are held by the lender, while conventional loans are sold on the secondary market. Conventional loans can be sold on the secondary market because they’re required to meet strict standards and criteria set by Fannie Mae and Freddie Mac. Portfolio loans can be more flexible since lenders aren’t required to follow these standards and criteria.
- What do I need to qualify for a portfolio loan?
Specific qualification requirements will vary by lender, but generally, borrowers need to show sufficient income, assets, and creditworthiness.
- Is getting a portfolio loan a good idea?
Getting a portfolio can be a good idea depending on your situation. If you can’t qualify for a conventional loan, a portfolio loan can be a good option. However, just like with any major financial decision, you should carefully evaluate whether it’s right for you.
- Can you get a portfolio loan for an investment property?
Yes! Portfolio loans can be used to finance an investment property.
- What banks offer portfolio loans?
Portfolio loans are typically not offered by large banks but can be found at some local banks, such as First National Bank of America. If you’re looking for a portfolio loan, they’re more widely offered by private lenders that specialize in non-QM loans, like Defy.
- Are portfolio loans available in Texas?
Yes! Portfolio loans are available in Texas.
- Are portfolio loans available in Florida?
Yes! Portfolio loans are available in Florida.
- What are some alternatives to portfolio loans?
Alternatives to portfolio loans include government-backed loans, such as FHA, VA, and USDA loans, and jumbo loans. If a low credit score is preventing you from qualifying for a conventional loan, consider working on improving your credit as an alternative.
- What is a non-QM loan?
A non-QM loan is short for a non-qualified mortgage loan. It’s a type of mortgage that doesn’t conform to the lending criteria set by the Consumer Financial Protection Bureau (CFPB). This means that non-QM loans allow lenders to be more flexible with their standards and requirements for borrowers. Depending on the lender and the type of non-QM loan, applicants may be able to qualify with a higher DTI ratio and lower credit score than a traditional mortgage.
