What is a Portfolio Lender?
You may have heard the term portfolio mortgage lender if you are a home buyer or real estate investor. A portfolio mortgage lender, often confused by many people, makes loans and then holds these loans in their investment portfolio. A portfolio mortgage lender does not sell these loans on the secondary market. Portfolio mortgage lenders are often misunderstood by most homebuyers and investors, and often flat-out ignored.
However, they have proven time and again that they are important in the real estate funding conversation. Portfolio mortgage lenders are relevant as they award prospective home buyers something valuable: another option. As portfolio mortgage lenders usually have fewer requirements compared to large national banks, they make it easier and quicker for investors to get loans.
In most cases, portfolio mortgage lenders are smaller institutions, like community banks. On the other hand, large institutions usually don’t have a lot of incentive to hold onto loans for their whole life cycle. Therefore, they don’t make portfolio loans. Portfolio lenders are usually local banks, such as community banks, that lend their own money, but don’t sell their loans.
Usually, portfolio mortgage lenders generate two types of income. These are fees from originating mortgages and profit earned from the net interest rate spread (also called difference). This is between various interest-bearing assets and the interest that is paid on deposits in the mortgage portfolio. A portfolio mortgage lender is often a great asset as they are more inclined to finance real estate investors.
So, more specifically, a portfolio lender will originate loans and then collect their fees. However, rather than selling the mortgage on secondary markets (like conventional lenders do), a portfolio lender holds on to the original loan.
What are Portfolio Mortgage Loans?
Portfolio loans are mortgages issued by small financial institutions. These mortgages usually don’t meet the guidelines of Fannie and Freddie. Hence, these mortgages are not sold on the secondary market. This is why portfolio mortgage lenders carry the risks associated with the loan. They also create their specific underwriting guidelines and often charge a closing fee and a premium rate.
It is worth noting that portfolio mortgage loans are usually more appealing as borrowers are able to maintain business relationships with the original lender. Also because borrowers can avail financing, without complying with many petty guidelines. Note that these loans cater to the real estate or property investment community. In most cases, buyers who are eligible for conventional financing will not be given the option of a portfolio mortgage loan.
These loans are typically meant to assist borrowers in situations which often fall outside the normal qualifying standards for homeowners in the US.
Benefits of a Portfolio Mortgage Lender
It is worth noting that if a portfolio lender keeps your loan in their portfolio of investments, it can benefit you considerably.
Rather than working with a lender who will service your loan from a different location, you can maintain your relationship with the original lender. As a result, you can contact them when you run into a problem. This will improve your customer service experience. Another benefit is that portfolio mortgage lenders don’t restrict the number of homes that you can purchase. This is at any given time, allowing Investors to buy multiple properties with portfolio loans.