A portfolio loan can be your opportunity to lower rates and other benefits for a mortgage
The economy has boomed since the housing bubble burst but that hasn’t made it any easier to get a mortgage loan. The Mortgage Bankers Association reports that lenders reject one out of every two loan applications.
One type of loan may hold the key to getting approved and at a lower interest rate.
Portfolio loans have been gaining popularity as small banks and credit unions look to develop relationships with customers as well as keep more of their loans in-house. For a borrower, a portfolio loan will look exactly like any
other loan but will come with some added benefits.
Find out how you can get a portfolio mortgage loan and how to take advantage of this trend in home loans.
What is a Portfolio Mortgage Loan?
When most banks make a mortgage loan, they put it in a group of other loans and sell it off to a pension fund, insurance company or an investment broker. The bank still collects payments on the loan but passes all that money to the buyer.
This gives the bank cash to make more loans and it receives something for continuing to collect payments.
A portfolio loan is different. When a bank makes a portfolio loan, it keeps the loan on its own books. It collects payments from the borrower and keeps all the interest. A portfolio loan is sometimes also called a non-conforming loan because it doesn’t conform to the requirements of programs like FHA, HUD or other guidelines to sell to a third-party.
There are a few reasons why a bank might make a portfolio loan rather than sell it after origination:
- Smaller community banks and credit unions would rather be in the business of making money off interest rather than selling their loans.
- The loan might not qualify to be sold off, i.e. the borrower’s credit score might be too low or the loan-to-value not high enough.
There are a lot of different reasons within these two ideas why a bank would make a portfolio loan but it all amounts to an opportunity for the borrower. Portfolio loans can be an opportunity to get the mortgage loan you need when you can’t get one from a traditional bank.
How is Portfolio Loan Important?
A Portfolio Loan is a loan in which the interest rate of the loan varies based on changes to an underlying index. The index may be related to treasury bills, treasury notes, mortgages, investment-grade corporate bonds and other such securities that carry lower risk than individual loans or securities.
The borrower's creditworthiness one the single most important factor in determining the interest rates offered on portfolio loans. However, it is still possible for borrowers with poor credit scores to obtain a fixed interest rate by accepting a broker fee or prepayment penalty. These fees are usually only available for low-risk borrowers who have strong collateral backing their loans. Loans made directly from banks and other lenders usually do not offer these charges unless they are made at high interest rates to compensate.
A portfolio loan is a useful tool for high net worth individuals who are seeking to maximize returns on their investments. Typically, the securities in an investment portfolio never generate interest at rates that would allow them to pay for themselves and return more than what they were invested. On the other hand, if a borrower has several high-interest debts that he seeks to consolidate, then a portfolio loan may provide him with enough funds to do so while still generating positive returns over time. This type of credit structure can also be used by homeowners as an equity loan against their homes or commercial properties.
A portfolio loan can also be used by companies that are seeking additional liquidity and financial flexibility but do not want to sell off portions of their business. By accepting a one-time lump sum, businesses can avoid incurring the usual transaction costs on multiple smaller loans or selling equity stakes in their company. Additionally, accepting loan interest payments as cash allows companies to defer taxes until later years when they may experience higher income levels.
Overall, a Portfolio Loan is an attractive option for those who want access to significantly greater liquid reserves than what they have without bearing significant risk of losing their investments. While the amount of liquidity that is generated by this type of loan will vary, it remains a good option for high net worth individuals who want a strong level of flexibility without waiting out an initial large return on their investment.
How is a Portfolio Loan Different from a Traditional Mortgage?
For the borrower, there is really no difference between a portfolio loan and a traditional mortgage.
You may not have the same application requirements. Banks looking to sell your loan to another company will have very specific requirements for income, credit and for the property. All of this will need to be verified. A bank originating a portfolio loan will have its own requirement and might not be as strict if you’ve had a relationship with the bank for years.
Outside of the application process, there’s no difference. You will make payments to the bank in either case and your loan terms won’t change.
Portfolio Loan Rates
Banks know they need to offer loan buyers a high rate to get their money back when selling a loan. They don’t have that need when they make a portfolio loan because they are keeping the interest.
This means that portfolio loans usually come at rates lower than conventional mortgages by as much as half a percent. Mortgage rates rise and fall but right now, that means a portfolio loan at between 3.7% to 5.5% APR.
Portfolio loans can have variable rates, adjusting every six months on the change in the six-month LIBOR rate. Rates are typically fixed for 3 – 10 years and then adjust no more than 5% or 6% from their starting point.
Fees on portfolio loans are typically in-line with regular mortgages. Borrowers generally pay a 1% origination fee and closing costs between 2% to 5% depending on the lender. Terms on portfolio loans are also similar to other mortgages. You can get a loan for up to 30 years and the entire application process takes between 30 – 45 days.
How Much is the Down Payment on a Portfolio Loan?
The down payment on a portfolio loan is often lower than a traditional loan but will vary with the type of property. It’s common for a portfolio loan on a home mortgage to be as low as 3% with a good credit borrower. This means that for a $250,000 loan, you would need just $7,500 down.
For investment properties where the owner will not live in the building, a down payment of between 10% to 20% the property’s value is more common.
Simple Steps for Portfolio Loan Application Process
Applying for a portfolio loan is just like getting any other mortgage. You can apply in-person at a local bank or online. Qualifications for a loan vary but most in-person loans at a community bank or credit union will require:
- 640+ FICO credit score
- At least one-year banking account with the bank
- 5% to 15% down payment
- Fees up to 8% of loan
- Rates between 3% to 6%
SoFi offers mortgage loans, personal loans and student loan refinancing with a two-minute application process. Rates start at 3.75% on 15-year fixed and adjustable-rate mortgages. Down payment is as low as 10% with no primary mortgage insurance.
SoFi offers an easy mortgage calculator to see exactly what your payments will be for any type of loan. For example, a portfolio loan for $247,500 on a $275k home at 4% interest would be a monthly payment of $1,181 for 30 years.
Portfolio Loan Pros and Cons
Portfolio loans are great alternatives to a regular mortgage because you work more closely with the bank and can get better rates. The bank keeps your loan rather than selling it off to an investor which means the bank is interested in building that long-term relationship with you.
Portfolio Loan Pros:
- Typically lower interest rates because the bank doesn’t have to sell a higher-rate loan to a third-party
- Less stringent application standards that may allow for bad credit borrowers
- A bank that’s willing to work with you rather than just see you as a dollar sign
Portfolio Loan Cons:
- Portfolio loans are not as common or available as regular mortgages and are usually only offered by community banks and credit unions
- Mortgage limits might be lower on portfolio loans because the bank has to hold the loan for decades
A portfolio loan mortgage can be a great opportunity for borrowers, especially those with bad credit that don’t qualify for other types of loans. Shop around for your portfolio mortgage because every bank will have its own set of conditions and rates. Don’t forget to check your rate with online lenders as well to make sure you’re getting the best deal possible.
Read the Entire How to Get a Loan Series
- Is it Possible to Get Bad Credit Home Loans?
- How to Get Peer-to-Peer Online Loans with Bad Credit
- 4 Different Places You Can Get Loans
- 5 Websites to Get an Emergency Loan on Bad Credit
- How to Get a Personal Loan with No Credit and No Cosigner
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.