What is a portfolio loan? A portfolio loan is one where the lender keeps the loan in its “portfolio” and does not sell the loan in the secondary market. Okay, so what is the secondary market? The secondary market as it relates to the mortgage industry ensures liquidity in the mortgage market where lenders can buy and sell home loans. This liquidity is so very important in the industry because without it, lending activity would shrink and rates would rise.
The most common loans bought and sold in the secondary market are those that adhere to standards set by Fannie Mae and Freddie Mac. Each entity issues its own guidelines and as long as a loan is approved using those standards, the issuing lender can sell that loan to Fannie or Freddie or even to other lenders. When financing a loan the lender taps into its credit line, funds the loan and then sells it. Doing so replenishes the line of credit, allowing the lender to make still more mortgages. Nearly two out of every three mortgages issued today are either Fannie or Freddie.
But there are plenty of other scenarios that do not follow these guidelines. Borrowers can still have good credit and a down payment but for whatever reason can’t qualify for a traditional mortgage. For example, a standard requirement for a conventional loan is having two years in the workforce. The borrowers might be an excellent credit risk but may not yet have reached the two year minimum. A portfolio loan however can approve the application in this scenario with say just one year of employment.
Another scenario relates to income. Fannie and Freddie guidelines ask for two years of employment and the most recent copies of pay check stubs covering a 30 day period. Self-employed borrowers are asked to provide the last two years of income tax returns along with a year-to-date profit and loss statement. Instead of providing two years of tax returns, a portfolio loan can require the last 12 months of business bank statements instead. The deposits on the bank statements are averaged over a two year period and used as qualifying income.
A portfolio loan is one that finds a niche in the lending industry and creates a home loan that meets those requirements. When an “out of the box” approval is needed, it’s a portfolio loan that can help.