I wanted to write about the benefits, and pitfalls, of a portfolio lender. At Hallmark, we do not have portfolio loan programs at this time, but from time to time, I run into loans that would fit best in a portfolio program. Over the years, I have built relationships with local lenders that have portfolio loans, and always reach out to them, if the traditional route does not work. My number one goal is making sure the deal gets done, even if I can’t do the loan.
What is a portfolio lender?
Portfolio lenders are banks that lend their own money, and keep and service the loans after closing. For this reason, they do not worry about making sure that the loan meets Fannie/Freddie guidelines, only that the loan meets their internal guidelines. Portfolio lenders use significantly different underwriting techniques when reviewing the loans, and often overlook traditional underwriting hurdles that we see, like not being self-employed for 2 years, and high debt-to-income ratios – this can really make a deal happen that would be doomed in the traditional lending world.
As an example – I was working on an loan for a physician who had most recently been working in Africa the last 3 years doing missionary work, and had not filed US Tax Returns for those years. These days, that pretty much rules out a traditional mortgage. I reached out to a portfolio lender, who was able to do the loan — no questions asked about tax returns — once they saw the large down payment, and good credit history. This is a perfect example of the niche market that portfolio lenders can successfully serve.
There are very real drawbacks to using a portfolio lender:
1. A 20% down payment (or more) is required. A lot of clients I work with, and almost all first-time buyers, do not have a 20% down payment
2. Portfolio loans are never a 30 year fixed. These loans are typically 5/1 or 7/1 ARMs, that are only fixed for the initial terms, after which the rate will adjust. 99% of clients I spoke to over the last 5 years, have only been interested in a 30 year fixed loan.
3. Most portfolio lenders will, in addition to portfolio loans, also offer traditional Conventional financing. On traditional programs, portfolio lender’s interest rates are typically higher than the market average. So if you are looking for a traditional 30 year fixed, less than 20% down payment loan, it is not in your best interest to go straight to a portfolio lender first.
4. Portfolio lenders do not offer VA or FHA financing, which are the best loan programs for some buyers
5. Traditionally, perfect credit scores are required, so previous bankruptcies, foreclosures, collections, high credit card debt balances can often rule out a portfolio loan
Portfolio lenders serve a great niche in the market, but may not be the right choice for every borrower, in every situation. A home buyer will find more options and better interest rates/terms speaking to a traditional lender like me, first. After reviewing the file, if I cannot get them the best terms on a traditional loan, then I will personally reach out to a portfolio lender to see about their options. If they can help, and the buyer is ok with an ARM loan, and can come up with the large down payment, then they’ve got a deal ready to close!
Call me with any questions you may have on portfolio vs. traditional lending, I would be glad to help!