You may or may have not heard the term ‘portfolio’ lender but those in the mortgage industry certainly have. Portfolio lenders serve an important niche in the lending community. Mortgages fall into just a few basic groups: conventional, government, and portfolio.
Conventional loans are the most common, making up around 80% of the entire lending market. If you go out and look for a 30-year fixed loan, for example, odds are it’s a conventional product. These loans are made and then sold into what is known as the ‘secondary’ market. Why do lenders sell loans? It’s pretty easy to understand if you think about it. Lenders can make money by collecting the interest each month or they can sell the loan and get money pretty much immediately. It would take forever for a lender to make a profit by only collecting interest. Or, the loan can be sold.
Lenders operate on a line of credit. They don’t go to their vault and pull out some cash. If they did that, they would soon run out of money and are no longer lenders. Instead, the loan is sold which then replenishes their stockpile allowing them to make even more home loans.
Government-backed loans are those that come with a government guarantee to the lender should the loan default. FHA loans for example fall into this category as do VA loans. USDA loans also provide lenders with a degree of comfort in case of a default. These loans are the second most popular in the lending world and are also sold into the secondary market.
So what is a portfolio loan? A portfolio loan is one that is not sold but instead is kept by the issuing lender. These loans will demand a larger down payment when compared to a government-backed or conventional loan as well as have higher rates. Who are these loans for? They’re for someone who doesn’t fit the mold for other types of mortgages. They may be for someone who has hard-to-prove income. The income is certainly there, but it doesn’t fit the traditional mold.
A newly graduated doctor with no employment history might fill the bill here. Typically, mortgage companies ask for at least a two-year employment history. Portfolio lenders follow their own guidelines and don’t cater to other lender program requirements.
