What Is a Portfolio Loan? Types, Rates & Terms Explained
This article is part of a larger series on Business Financing.
A portfolio loan is a mortgage loan that is held by the mortgaging company and not sold on the secondary market to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac). Portfolio loans help small business owners who cannot qualify for a traditional mortgage loan or who want to finance multiple properties on the same mortgage loan.
The underwriting guidelines used by portfolio lenders can vary from lender to lender because the loans don’t have to conform with federal underwriting guidelines. This can mean higher rates and higher fees for borrowers. But, conversely, it can also mean allowing borrowers to have higher debt-to-income, loan-to-value, and loan size maximums.
For borrowers looking for a portfolio lender that allows them to grow a large portfolio, CoreVest is a good choice. CoreVest offers both an online application and a chatbot on its website, which can help you get the process started. CoreVest also offers an 800 number if you would prefer to speak to someone on the phone.
Reasons to Choose a Portfolio Loan For Financing
Because the guidelines for portfolio loans are set by the individual lenders and not by the federal government, the lender has a significant amount of leeway in the terms set for the mortgage. There are several ways this can benefit the borrower compared to going with a traditional mortgage loan:
- No limit on loan size: Because the loans aren’t sold on the secondary market to Fannie Mae or Freddie Mac, they don’t have to conform to the jumbo loan limits set forth by the federal government. This makes it possible for blanket loans containing multiple parcels of land to be financed into the same loan.
- Smaller down payment requirements: The lender can decide to finance as much of the property purchase as they desire, which means a borrower might need little to no money down at the time of purchase. The lender also might not require private mortgage insurance (PMI), which lowers the monthly payment.
- Borrowers with low credit scores are considered: The portfolio lender can decide the level of risk it wants to take with a borrower. Because of this, it can consider lending to borrowers with any credit score. However, most lenders still require credit scores above 620 for commercial or investment properties. Borrowers with subprime credit scores should expect to pay higher rates and closing costs.
- Borrowers with irregular income are considered: It can be difficult for self-employed borrowers to qualify for a traditional mortgage. Many lenders require at least two years of steady self-employment to qualify for a mortgage. A portfolio lender has more flexibility to work with a well-qualified borrower with irregular income, such as a farmer who might get paid on an annual or semi-annual basis.
- Borrowers with strong credit can get great deals: Because the portfolio lender holds the loan, it’ll want to strengthen its portfolio with as many high-credit-score loans as possible. This will strengthen the overall lending profile for the bank’s investors and federal regulators. Portfolio lenders will work with strong-credit customers by offering great rates, low down payment requirements, and higher debt-to-income maximums.
In addition, borrowers can purchase properties that won’t qualify for traditional loan programs. Whether it’s the condition of the property or the type of property, portfolio lenders can step in and finance where traditional lenders cannot. For example, the following projects would be ineligible for financing with Fannie Mae but would be eligible for a portfolio mortgage:
- Projects that operate as hotels or motels
- Projects subject to split ownership arrangements
- Projects that contain multidwelling unit condos or co-ops
- Projects with property that’s not real estate
- Commercial space and mixed-use allocation (Fannie Mae limit is 35% of property used for commercial space or allocated to mixed-use)
In addition, traditional mortgage lenders might be hesitant to lend on manufactured homes or homes that don’t have permanent foundations. A portfolio lender can decide to lend on those properties without worrying about being unable to sell the loan.
If you decide to get a portfolio loan, check out our buyer’s guide, which includes a list of the best portfolio loan providers, including the costs, terms, and required qualifications for each lender.
Reasons to Avoid Getting a Portfolio Loan
While there are many advantages to a portfolio loan, it’s not always the best choice for financing. Here are some of the reasons to stick with a traditional mortgage instead of going with a portfolio loan:
- Interest rates can be higher: While lenders can offer borrowers great deals to go with a portfolio loan instead of a traditional mortgage, they also can charge higher interest rates. This is especially true of subprime credit borrowers and borrowers with high debt-to-income or debt service coverage ratios.
- Closing costs can be higher: Portfolio lenders can charge higher closing costs, especially origination fees. Because they don’t sell the mortgage on the secondary market, they might often want more money upfront to help with the lender’s cash flow. Again, the less qualified a borrower is, the higher the fees to help mitigate the risk to the bank.
- The lender might want to sell the loan down the road: If a portfolio lender thinks it might want to sell your loan sometime in the future, you’ll lose most of the benefits of going with a portfolio lender. It’ll need to be underwritten to the strict federal guidelines so the lender can sell it. Be sure to check your disclosures closely—a lender must disclose if it intends to sell your loan or its servicing at some point in the future.
- Fewer consumer protections: One of the biggest benefits of a loan underwritten by federal guidelines is the built-in protections for the borrower. By requiring a lender to meet its guidelines and issue required disclosures, the government protects a borrower from getting a loan it cannot afford. Loans that fall outside what’s considered a qualified mortgage may have fewer federal protections.
Common Portfolio Loan Situations
There are several common situations where a lender would keep a loan as a portfolio loan rather than selling it on the secondary market. Here are three common situations, common terms for each, and reasons why the lender would choose to keep it in its portfolio:
Blanket Mortgage Portfolio Loan
Terms & Costs
Blanket Mortgage Loan Sizes | $100,000 to $50 million |
Loan Term | Two to 30 years |
Common Amortization Periods | 15, 20, or 30 years |
Starting Interest Rates | As low as 4% |
Typical LTV | 50% to 75% |
Cash Reserve Requirements | Six months |
Blanket mortgages allow a borrower to purchase multiple parcels of land on the same mortgage loan. Most of them are set up with release clauses that enable the lender to release parcels from the mortgage as they’re sold individually. Lenders will keep this in their portfolio because either the loan amount is too high or too many properties are being financed to sell on the secondary market. Most conforming loans limit the number of properties you can finance to 10.
This type of loan is especially attractive for borrowers looking to build a subdivision of homes. The land can be financed in a blanket mortgage, and then parcels are released and sold as the houses are built. It keeps the builder from having to apply for a new mortgage for each separate property.
A good lender for blanket portfolio loans is CoreVest. CoreVest’s blanket mortgage product has terms of five, seven, or 10 years, with up to a 75% loan-to-value ratio. In addition, CoreVest offers both an online application and a chatbot on its website, which can help you get the process started.
Jumbo Portfolio Loan
Terms & Costs
Jumbo Mortgage Loan Limit | Usually, $548,250—some are higher |
Loan Term | 15 to 30 years |
Common Amortization Periods | 15, 20 or 30 years |
Starting Interest Rates | As low as 2.625% |
Maximum LTV | 80% |
Cash Reserve Requirements | Six months |
A jumbo portfolio loan is any mortgage loan that’s too large to be sold on the secondary market. The Federal Housing Finance Agency (FHFA) sets the jumbo limit annually. Any mortgage above the jumbo limit is ineligible to be sold to Fannie Mae or Freddie Mac. The limit is set on a county-by-county basis. In 2021, the jumbo limit for a one-unit property in most counties was $548,250. Counties in more expensive areas of the country went as high as $822,375 for a one-unit property.
It’s not unusual for blanket mortgages and cash-out refinances to also be jumbo portfolio loans. However, a single apartment complex could easily exceed the jumbo limits, becoming a portfolio loan.
North American Savings Bank (NASB) has a jumbo loan product that lends up to $15 million for between five and 10 years. NASB also works will borrowers who are self-employed or are looking for other types of non-conforming loans. Check out NASB’s website for more information or to apply.
Cash-out Refinance Portfolio Loan
Terms & Costs
Cash-out Mortgage Loan Sizes | No minimum |
Loan Term | 15 to 30 years |
Common Amortization Periods | 15, 20 or 30 years |
Starting Interest Rates | As low as 3% |
Maximum LTV | 80% |
Cash Reserve Requirements | Six months |
In a cash-out refinance loan, a borrower reworks an existing mortgage to obtain the equity locked in the property. This can happen when a loan has been paid down over time, when significant improvements have been made to the property, or when a recent appraisal has revealed a large valuation increase. The money received by the borrower isn’t taxed and can be used for rehabilitation of a property, purchase of another property, or even debt consolidation.
A lender might keep this type of loan as a portfolio loan because it exceeds jumbo loan limits or it’s a blanket mortgage that cannot be sold on the secondary market. They might also keep it if the refinance is on an existing loan with the bank and the customer has a strong credit profile that the lender wants to keep in its portfolio.
Lima One Capital has various lending options, including rate and term refinances and cash-out refinances. Lima One Capital is an excellent choice for both new and experienced investors. Visit Lima One Capital’s website for more information and to begin the application process.
Bottom Line
Portfolio loans are mortgage loans that a lender keeps in its lending portfolio. Some of these loans cannot be sold on the secondary market, meaning the lender has no choice but to keep the loan. However, a lender will keep mortgages in its portfolio from borrowers with strong credit profiles. This will keep the portfolio strong, which is important to the lender’s investors and federal inspectors.
These loans can be good for borrowers, but you should ensure the interest rates and fees aren’t too high with a potential portfolio loan. Always shop around with different lenders before moving forward with any type of mortgage loan.
