Portfolio Loans

What is a Portfolio Loan?

Portfolio Loan Definition

A portfolio loan is a loan that is serviced by the lender that issued the money. Here are the basics of the portfolio loan and how it works.

Loan Servicing

In most cases, loans that are issued by a lender are packaged together with other loans and sold in the secondary market. With a portfolio loan, the lender that initially wrote the loan is going to hang onto it and keep it as part of their investment portfolio. The 2 things that are most commonly sold are the "servicing" of the loan (collection of monthly payments) or the actual "promissory note".

Not a "one size fits all" or "vanilla" loan

Most loans are granted to home loan borrowers using standard documentation of income, employment, assets and property "collateral" types. For example:

  • 2 Years Employment in the same line of work
  • W-2 Income and Tax Returns for 2 years to show job stability
  • Loan is made on a Single Family House, Townhome, "Warrantable" Condo (A property that conforms to Fannie Mae, Freddie Mac or Ginnie Mae* guidelines)

*Ginnie Mae is a government-owned corporation that guarantees bonds backed by home mortgages that have been guaranteed by a government agency, mainly the Federal Housing Administration and the Veterans Administration.

Portfolio loans often fill a specific need of a borrower. Here are just a few of the many situations where a portfolio lender can help:

  • Self Employed borrowers might be able to use bank statements to show their income when buying their primary residence or vacation home, instead of using tax returns that might have too many tax deductions.
  • Investors who buy home to be used a rental property might find the bank will not lend to a borrower with more than 5 or 10 properties with an existing loan on them... but a portfolio lender may allow for an unlimited number of existing properties with loans as long as they personally do not have more than 5 loans for the same borrower.
  • Investors may be able to get a "stated income loan" or even "no income verification" if they have a good credit score and are putting a substantial down payment on the property they are buying (or have enough equity on a property they are getting a refinance on).
  • Foreign Nationals can get financing on a vacation home or an investment home (not a primary residence) by only having to show their passport, a letter of good standing from their foreign bank and putting down a sizable down payment (30% is the most common down payment needed). Additionally, they do not have to have a US credit report like the big banks require.
  • Vacation Condo Buyers can get financing on properties that are considered "Non Warrantable" or uninsurable by the the big banks who sell their conforming loans back to Fannie, Freddie or the FHA and VA.
  • Condotel Buyers can also get financing on vacation properties that have a front desk or commercial areas in the same building, where as the big banks won't touch these loans.
  • Borrowers who have had misfortune of a bankruptcy, foreclosure or other negative credit situations can often find financing that is not available from the banks due to federal guidelines or the bank's own "overlaying conditions" that even more restrictions above and beyond the loan parameters or program guidelines that FHA, VA, USDA, Fannie Mae or Freddie Mac would accept from a borrower. One example would be not allowing a borrower with a FICO score below 640 to get an FHA loan when other lenders will accept a much lower score.  

The "Low Hanging Fruit" in the Big Bank Lending World

Typically, most loans are granted after an automated decision of creditworthiness is determined by a computer when submitting the borrowers credit report and other information on the 1003 loan application. There are three main decision approval systems used:

  • DU or "Desktop Underwriter" is the system that approves (or declines) Freddie Mac Loans.
  • LP or "Loan Prospector" is the system that determines the creditworthiness for Fannie Mae Loans.
  • GUS or "Guaranteed Underwriting System" is the system that is used for USDA Home Loans in Rural Areas.

If an approval is not granted by one of these 3 systems, the the loan file (application) must be manually underwritten. Often when this happens the loan originator or mortgage consultant will need to ask for extra documentation to get the loan approved. The majority of bank loan officers, home mortgage consultants and direct lender loan advisors will hit a brick wall if they cannot get approval from their underwriting department at this point.

This is where the mortgage broker shines with portfolio loan programs, because most big banks are very "thin" on loan options for their clients when the "vanilla" loan programs don't work. So, most loan officers just move on to the next customer to see if they can approve that customer's loan.

Brokers with Portfolio Loan Programs are Better

Unlike the "vanilla" loan programs that all the banks offer... there is a whole world of portfolio loan programs that can turn a Bank Decline Letter into an "Approved". Why? Because portfolio loans are manually underwritten right from the start, not as a last recourse response to a Ineligible Decision by a computer program. Portfolio lenders know what they are willing to lend on... and often make exceptions if the loan makes sense. What a novel idea... personal banking that grants loans base on each borrowers unique situation!