What Is A Portfolio Loan?

Can’t get a traditional mortgage? Don’t worry. Borrowers have several choices if they can’t qualify for a conventional loan. A portfolio loan is one of the backup options that give borrowers and lenders more flexibility. Lenders can offer nonconforming loans like portfolio loans that make your path to homeownership easier. While these loans may be your only path to homeownership, they come with some risks to consider. This article will cover how these loans work, how they differ from conforming mortgages, and if this loan is a good option to consider.

Portfolio Loans vs. Traditional Home Loans

Traditional home loans have more requirements and reduce a lender’s risk. Borrowers need to fulfill several requirements in areas like credit score, debt-to-income (DTI) ratio, and other areas. These home loans have more restrictions because the government backs them. Most banks sell conforming loans to Fannie Mae and Freddie Mac to minimize their risk.

Portfolio loans put more risk on the lender. Since these loans do not conform to traditional requirements, the lender cannot sell the loan on the secondary market. But, for better or for worse, the lender is committed to the loan, even if the borrower defaults on the first day. This is why most lenders want to see that you have a good financial profile. Lenders offering these financial products will still have credit score requirements and look at your debt-to-income ratio in most cases, but they also have more lenient requirements than traditional banks.

Advantages and Disadvantages of a Portfolio Loan

Every financial product has strengths and weaknesses. Understanding how these characteristics compare to other loans will help you get the right financing for your home. These are the advantages and disadvantages to keep in mind if you are considering a portfolio loan.

Advantages

• Easier access to financing: It’s no secret that most people hear about portfolio loans because they need unconventional mortgages. You don’t need to have the best credit score or a great debt-to-income ratio to get this financing from some lenders. Those factors still matter, but lenders like Angel Oak can provide flexibility. It’s also important to seek out this type of financing if you need to borrow more money for your home than Fannie Mae and Freddie Mac allow.
• Quicker access to capital: It can take several months to get a mortgage. Conforming loans have more complex underwriting processes and more red tape. Portfolio loan providers don’t have those hurdles. There’s still an underwriting process, and you won’t receive your mortgage within 24 hours. Still, these lenders provide an accelerated process for borrowers seeking capital sooner; getting capital earlier than others can make you more attractive to a seller.
• You earn the mortgage lender’s trust: Fannie Mae and Freddie Mac loans are less risky for lenders. They can sell the mortgages to the secondary market and offload the burden. With a portfolio loan, the lender is committed to seeing it through. They can’t run off and sell it in the secondary market if the borrower falls behind. The lender takes on more risk, and if you make payments on time, you will earn their trust. This trust can speed up approval and help you get better terms on future loans.
• Flexibility with term length: Most mortgage lenders let you choose between a 15-year mortgage and a 30-year mortgage. While a 15-year mortgage gets paid off faster, you will end up with higher monthly payments. Those elevated payments will reduce your property’s cash flow. On the other hand, 30-year mortgages reduce your monthly payments and increase your cash flow, but you stay in debt longer. It’s nice to know borrowers have a choice instead of only having one option.

Disadvantages

• Higher interest rates and fees: These loans cost more money than conforming loans. A rule of thumb is that a loan will always cost more money if the lender incurs more risk. That’s why unsecured credit cards almost always have higher interest rates than debt with collateral (i.e., a conventional mortgage on a home). You might also have a higher prepayment penalty on this loan than on a traditional loan.
• Higher down payment: The portfolio lender may require a higher down payment for the loan. The higher down payment minimizes their risk, but it also means you’ll have to raise more funds. You can get away with a 3% down payment on a conventional loan if your credit score and debt-to-income ratio are good enough. Don’t expect that type of treatment for a portfolio mortgage loan.
• You still need good finances: While portfolio loans are more accessible than other types of loans, the lenders offering these loans still have standards. If you have bad credit, you won’t be able to get one of these loans.

Who Is a Portfolio Loan Best For?

A portfolio loan is best for aspiring homeowners who do not qualify for traditional financing. This can be due to various factors such as a low credit score, high debt-to-income ratio, or asking for more capital than traditional lenders can give. In addition, Fannie Mae and Freddie Mac set limits on how much you can borrow to buy a house, and your location influences those limits. For example, in 2023, mortgage amounts for one-unit properties are capped at $498,257 in low-cost areas and $1,149,825 in high-cost areas. The national conforming limit for a one-unit property currently stands at $766,550. The FHA adjusts these limits each year, usually raising them.

Regardless of why you don’t qualify for a conventional mortgage, you still need a way to finance your home. A portfolio loan can come to the rescue as long as you have enough money for a high down payment. Portfolio loan providers can look at other criteria to see if you qualify, such as the size of your investment portfolio or how much money you make before taxes. Many financial institutions look at taxable income to assess if you can afford a loan. This methodology puts entrepreneurs and real estate investors at a disadvantage since they use many tax write-offs to save money. Write-offs lower taxable income, which makes borrowers less enticing from a conventional lender’s point of view, but portfolio loan providers look beyond this archaic model.

What are the Requirements to Get a Portfolio Loan?

Financial institutions and lenders don’t brag about their portfolio loans. The loans carry substantial risk, and they usually reward it to their most trustworthy clients. You will have more difficulty obtaining this loan if you have a bad credit score. Unconventional lenders make financing more accessible to consumers, but they’re not going to lower their standards as much as predatory payday lenders. Just like any lender, portfolio loan providers assess risk and work with borrowers they can trust. Each lender has its own requirements around credit score and other factors that can demonstrate your ability to repay the loan.

The Process of Getting a Portfolio Loan

A portfolio loan can give you the extra funds you need to purchase a home. Here’s what the application process looks like if you are interested in this type of loan.

Application for Portfolio Loan

Mortgage lenders offering portfolio loans will request several documents, such as your recent tax returns and personal identification. You will have to review all of the required documents and ensure you have all of them ready to go.

It’s best to apply for multiple portfolio loans within a 14-day span. Any hard credit checks within a 14-day stretch only count as a single hard credit inquiry for credit scoring purposes. Hard credit checks are a part of the loan application process and typically reduce your credit score by a few points. It’s best to avoid applying for any other loans or lines of credit leading up to a portfolio loan application.

Choosing the Right Portfolio Loan

Local banks, credit unions, and online lenders are some of your available choices. However, you shouldn’t commit to the first bank you find. Shopping around can help you avoid loans with higher rates and get more favorable loan terms. It’s a good idea to compare numerous loans before committing to an offer. Each lender may also have different eligibility requirements, so you should check if your financial situation is sufficient to qualify for a loan.

Managing Your Portfolio Loan

These loan products have higher loan amounts than most financial products. You can typically choose between a 15-year and a 30-year mortgage term. However, it’s a good idea to make an additional payment each month to get out of debt faster. While this strategy is useful for any financial product, it’s especially useful for portfolio loans since they typically have higher rates.

Individuals should assess their finances before investing in portfolio loans. Aspiring buyers should ensure they have enough money for a high down payment and the ability to make monthly payments.

Is a Portfolio Loan Right for You?

If you have a lot of money sitting on the sidelines, can’t get a conventional loan, and have enough flexibility to make monthly payments, a portfolio loan can be right for you. You will also need a good credit score, but unconventional lenders have different standards. You should look at the requirements before applying for a loan since each application results in a hard credit check.

Not qualifying for a conventional mortgage does not always indicate that you can’t repay the loan. Some financial institutions may reject your application because tax write-offs inflate your debt-to-income (DTI) ratio, or you may not make any money but have a large portfolio. Even if you have enough assets to cover the home purchase, most traditional lenders will look at your debt-to-income ratio and see you as a risk.

However, unconventional lenders can think outside of the box and see that some borrowers aren’t as risky as traditional lenders make them out to be. Granted, you will have a higher interest rate and more fees, but if this is the only financing you can get, it’s better than not getting your first or next property.

A good investment property can generate enough cash flow to cover the monthly mortgage payments and property tax bills. Having this setup will make a portfolio loan worth it since you use the cash flow to gain more equity in your property. However, it’s also good to see if you are over-leveraged, as some real estate investors can get caught by surprise if they have any vacancies.

Where to Get a Portfolio Mortgage Loan

A portfolio mortgage loan can be a good idea for consumers who can’t get traditional mortgage loans. If you want to buy a house but financial institutions won’t give you the capital you need, you can seek an alternative lender like Angel Oak Mortgage Solutions.

Angel Oak Mortgage Solutions provides several Non-QM home loans, and you can even get traditional loans from them if you match the requirements. If you want a portfolio loan or would like to see Angel Oak Mortgage Solutions’ other solutions, you can visit their website and fill out this simple form to learn about how you can get funding for your home purchase.

FAQs About Portfolio Loan