Celeste O’Hara, NHCB

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What is a Portfolio Loan?

Unless you’re in the mortgage business you probably don’t know what a portfolio loan actually is. But in reality, portfolio lending has been around for decades, much longer than conventional loans that are approved using Fannie Mae or Freddie Mac guidelines. In the “olden” days, banks would have their own internal mortgage approval guidelines. There wasn’t any sort of a “secondary” mortgage market where banks could sell loans, replenishing their credit lines, like there is today. For nearly two out of three loans issued in the current marketplace are approved using guidelines issued by Fannie or Freddie. But portfolio is still an important player in the industry and without them there’s little doubt the housing industry in general would slow down.

A portfolio loan is one where there is no intended sale of the approved home loan. Instead, the lender approves the loan and keeps it in it’s “portfolio.” Most portfolio loans are made because the applicant has some sort of issue that currently keeps a conventional approval at bay. Why would a lender make a portfolio loan in the first place? I mean, if a loan can’t go Fannie or Freddie, then there’s something wrong with the file, right? No, not necessarily. Take for example someone that just started a new business. Maybe someone that worked as a carpenter for five years and was so good and his customers loved him, he started out on his own. A few months later, business was so good that he decided it was time to buy a home. He could certainly afford it with his new income and he had enough money in the bank to close a purchase. And to top it off, his credit score was hovering around 750. But he got turned down when he applied. Why?

Most conventional mortgage loans require someone be self-employed with at least two years of business tax returns filed. If you’ve only been in business for maybe a year, you’re not going to meet that requirement. Lenders want to make loans, and have to if they want to continue to be lenders, but they also have to sell loans. But with a portfolio loan, there might be an approval ahead.

A portfolio loan looks at an application that is a “this makes sense” type of loan. The loan won’t be sold but held. The lender makes money on the interest paid each month and not with a sale in the secondary markets, and with an eye on the future.

Portfolio loans ask for a higher down payment, slightly higher rates and maybe fees. The common goal for a portfolio loan, at least in the borrower’s mind, is to fix whatever needs fixing that keeps a conventional approval on hold. Once that goal is met, the borrower can refinance out of a portfolio loan and into a conventional one with better rates and terms. But without portfolio lending, buyers would have to wait, or maybe even being shut out of the housing market completely.

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