How a Portfolio Loan Can Help You Buy a Home

If you want to buy a home but can’t qualify for a conventional or government-backed home loan, you may feel like home ownership is out of your reach. You may have recently undergone a major life change, such as switching from a 9-to-5 job to self-employment, so you are finding it difficult to find a lender. Fortunately, alternative financing exists to help people in your situation become homeowners – including portfolio loans.

Learn more: Types of real estate loans

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In many cases, the mortgage lender that issues your loan sells it to a government-sponsored enterprise (GSE), such as Fannie Mae or Freddie Mac, to generate new financing. But portfolio loans work differently. When you take out a portfolio loan, the lender keeps it on its books rather than selling it on the secondary market. Real estate portfolio loans are not government backed (such as FHA, VA, and USDA loans) and are generally insured, issued, and serviced by a private lender.

The mortgage works similarly to a traditional mortgage in that you must apply for the loan, meet eligibility criteria, finalize the loan and make monthly payments as agreed upon. However, since these loans are held by portfolio lenders, they are not subject to the GSE requirements. As a result, lenders can “…set their own guidelines and often make exceptions and approve loans that would be rejected by traditional underwriting guidelines,” said Jennifer Pistone, a senior vice president at the bank. Price (previously guaranteed price)via email.

Beston recommended researching and meeting with several loan officers to find out their options for your unique situation. Doing this will help you feel confident that you are working with an expert and securing the best deal possible.

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Portfolio loans are not standardized, so there are no consistent borrowing requirements from lender to lender. However, Andrea “Bella” Belloni, CEO of homebuying company Bellonys, said via email that the following qualification criteria are common:

Your lender may also charge additional fees to offset the additional risk of originating a loan that may not meet traditional underwriting qualifications. The interest rate and closing costs can be higher than a traditional mortgage. Additionally, you may be subject to a prepayment penalty if you pay off the debt early.

Learn more: How is the mortgage underwriting process done?

“Once you’ve done your research, I suggest getting pre-approved by your top two loan officers and getting fully underwritten,” Piston said. “Ask them to go over the rates and fees and spend time walking you through what to expect and the pros and cons of the loan product they are proposing.” Then, you can choose the best option.

Don’t be afraid to advocate for yourself to get a good deal. “Try negotiating early repayment fees to allow you to refinance into a (conventional) loan without having to pay a very large prepayment penalty,” Randall Yates, co-founder of the Virginia Loan Network, suggested via email.

Read more: How does a prepayment penalty on a mortgage work?

4. Finalize the loan and enter into repayment

If the bank approves your request, you will receive clear permission to close. Like any other mortgage, you’ll sign the paperwork on closing day, make the down payment, and complete the transaction. Soon, you will receive your first mortgage billing statement.

Dig deeper: Home closing – what to expect and how to prepare

Like any financial product, portfolio loans have benefits and downsides. Here are some of the most important ones:

• Access to financing when you don’t qualify for a traditional mortgage

• You can start building equity and hopefully improve your financial situation

• A stable relationship with the same mortgage lender for the life of the loan

• Interest rates and fees are likely to be higher than other types of mortgage

• A higher down payment is usually required

• You may need significant cash reserves or assets to qualify

Learn more: How to build equity in your home

“Wallet loans are like financing solutions tailored to those who don’t adhere to the usual terms,” Yates said. “I see these loans as essential for some people who are often passed over by traditional lenders – such as newly self-employed people, people with poor credit, or those who need more than their usual loan limits.”

A portfolio loan may be right for you if you’re trying to get back on your feet after bankruptcy or divorce, Bellone said. This type of mortgage can also work if you have significant assets rather than verifiable W-2 income.

However, if you can qualify for a conventional mortgage, you’ll likely want to stay away from portfolio loans. Conventional and government home loans tend to be cheaper because they are less risky for the lender.

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According to Urban Institute data, portfolio loans accounted for more than 31% of mortgage originations in the third quarter of 2024. Pistone said the current and future popularity is due to several factors, including rising home prices resulting in jumbo loans (which generally don’t buy ) and an increase in the number of self-employed professionals.

Yes, you can refinance your existing mortgage into a portfolio loan. It may make sense to do this if you have the opportunity to secure a lower interest rate but don’t have recent tax documentation that meets traditional underwriting guidelines. In this case, your lender can issue the loan based on bank statements or other documents proving your ability to repay the debt.

Not all banks offer portfolio loans. Generally, mortgage lenders are credit unions or smaller local banks. You may also be able to get a loan through an online bank, such as Axos Bank.

This article was edited by Laura Grace Tarpley.