A solution for difficult-to-close mortgages

If you’re having trouble getting a home loan, perhaps after talking to several banks, lenders and even a mortgage broker, consider reaching out to “Wallet Lender“.

Portfolio lenders simply keep the loans they originate (instead of selling them to investors), which gives them additional flexibility when it comes to underwriting guidelines.

As such, they may be able to offer unique solutions that others cannot, or they may have a special loan program not found anywhere else.

For example, a portfolio lender may be willing to originate a mortgage with no down payment while others are only able to offer a loan up to 97% loan-to-value (LTV).

Or they may be more forgiving when it comes to marginal credit, a high DTI ratio, limited documentation, or any other number of issues that could prevent you from getting a mortgage through traditional channels.

What is a portfolio loan?

  • The home loan is kept on the bank’s books rather than sold to investors
  • It may come with special terms or features that other banks/lenders do not offer
  • Such as no down payment requirements, interest-only feature, or unique loan term
  • It can also be useful for borrowers with difficult-to-close loans who may have been rejected elsewhere

In short, a “portfolio loan” is a loan that is held in the wallet of the bank or mortgage lender, meaning it is not sold on the secondary market soon after it is originated.

This allows these lenders to take on greater risk, or finance loans that fall outside the traditional “fund of credit” because they do not need to adhere to specific underwriting standards.

Nowadays, most home loans are backed by Fannie Mae or Freddie Mac, collectively known as government-sponsored enterprises (GSEs). Or they are government loans backed by the Federal Housing Administration (FHA), the United States Department of Agriculture (USDA), or the Department of Veterans Affairs (VA).

All of these agencies have very specific underwriting standards that must be met, whether the minimum FICO score is 620 to get a conforming loan. Or a minimum down payment of 3.5% for an FHA loan.

If these conditions are not met, the loans cannot be packaged as mortgage-backed securities (MBS), delivered and sold.

Since small and mid-sized lenders often do not have the capacity to hold the loans they finance, they must ensure that the mortgages they guarantee meet these standards.

As a result, you have plenty of lenders who offer simple loans that you can get almost anywhere. The only real difference may be pricing and service.

On the other hand, portfolio lenders who are not beholden to anyone have the ability to set their own rules and offer unique loan programs as they see fit.

After all, they hold the loans and bear the risks, so they don’t need to answer to an agency or third-party investor.

This means they can make home loans to borrowers with a 500 FICO score, traditional no-documentation loans, or take advantage of rental-based underwriting (DSCR loans).

Ultimately, they can create their own lending list based on their risk appetite.

Portfolio loans can solve your financing problem

  • The loan amount is large
  • High DTI ratio
  • Low credit score
  • A recent credit event such as a short sale or foreclosure
  • Late mortgage payment
  • Owner of multiple investment properties
  • Asset-based qualification
  • Limited or uneven employment history
  • Qualifying through the rental income of the property in question
  • A unique loan program not offered anywhere else such as ARM, interest only, zero down payment, etc.

There are a variety of reasons why you might want/need a portfolio loan.

But this will generally happen when your loan does not meet the GSEs (Fannie/Freddie) guidelines or… Ginnie Maewhich supports the FHA and VA loan programs.

As mentioned, these types of mortgage lenders can offer things that competitors cannot because they are willing to keep the loans on their books, rather than relying on the investor to purchase the loans soon after they are originated.

This allows them to make mortgages that fall outside the scope of Fannie Mae, Freddie Mac, FHA, VA, and USDA guidelines.

That’s why you may hear that a friend or family member was able to refinance their mortgage with Bank X despite having a low credit score or high LTV.

Or that the borrower was able to get a $5 million jumbo loan, an interest-only mortgage, or something else that might be considered out of reach. Maybe even a very low mortgage rate!

A portfolio loan can also be useful if you have experienced a recent credit event, such as a mortgage delinquency, short sale, or foreclosure.

Or if you have limited documentation, consider a defined income loan or a DSCR loan if you are an investor.

Really, anything that falls outside the box can be taken into consideration by one of these lenders.

Who provides portfolio loans?

Some of the largest portfolio lenders are Chase, US Bank, and Wells Fargo, but there are smaller players as well.

Before they failed, First Republic Bank made private mortgages to high-net-worth clients who couldn’t be found anywhere else.

They came with below-market interest rates, interest-only periods, and other special features. Ironically, this is what drove them to collapse. Their loans were basically too good to be true.

It’s also possible to find a portfolio loan with a local credit union because they tend to hold more of the loans they originate.

For example, many offer 100% financing, adjustable-rate mortgages, and home equity lines of credit, while a typical non-bank lender may offer none of these things.

In general, portfolio lenders are depositories because they need a lot of capital to fund loans and hold them after they are originated.

But there are also lenders outside of QM that offer similar products, which may not actually be held in the portfolio because they have their own non-agency investors as well.

Interest rates on portfolio loans can vary widely

  • Portfolio mortgage rates may be higher than rates with other lenders if the loan program in question is not available elsewhere
  • This means you may pay for extra flexibility if they are the only company offering what you need
  • Or they could be special below-market deals for clients with a lot of assets
  • Either way, you should still take the time to shop around as you would with any other type of loan

Now let’s talk about mortgage rates for portfolio loans, which can vary widely like any other type of mortgage rates.

Ultimately, many of the mortgages originated today are commodities because they tend to conform to the same underwriting guidelines of an outside agency like Fannie, Freddie, or the FHA.

As such, the differentiating factor is often the interest rate and closing costs, since they’re all essentially selling the same thing.

The only real difference otherwise might be customer service, or in the case of a company like Rocket Mortgage, a quirky advertising campaign and some unique techniques.

For portfolio lenders who offer a truly unique product, loan pricing is entirely up to them, within what is reasonable. This means that prices can show a wide range.

If the loan program is high-risk and only offered by these people, expect rates much higher than what the typical market rate would be.

But if their portfolio’s home loan program is a little more flexible than the above agencies allow, their mortgage rates may be comparable or slightly higher.

It is also possible that the rate offered may be more competitive, or below market, assuming you have a relationship with the bank in question.

It really depends on your loan scenario, how risky it is, whether other lenders are offering similar financing, etc.

Ultimately, if the loan you need isn’t offered by other banks, you should go into it expecting a higher interest rate. But if you can close the deal, it could be a win regardless.

Who actually has a home loan?

  • Most home loans are sold to another company shortly after they are originated
  • This means that the bank that financed your loan will likely not service it (collect monthly payments).
  • Look for paperwork from a new loan servicing company after your loan money
  • The exception is a portfolio loan, which may be held and serviced by the original lender for the life of the loan

Many mortgages today are originated by a single entity, such as a mortgage broker or direct lender, and then quickly resold to investors who make money from paying off the loan over time.

Gone are the days when your local bank would offer you a mortgage and expect you to repay it over 30 years, culminating in you heading to the branch with your final payment in hand.

Well, there may be some cases, but now they are the exception rather than the rule.

In fact, this is part of the reason why the subprime mortgage crisis occurred in the early 2000s. Because originators no longer held onto the home loans they made, they were happy to take on more risk.

After all, if they are not the ones who own the loans, their performance does not matter, as long as the loans are underwritten based on acceptable standards. They earn their commission based on closing the loan, not based on the loan’s performance.

Today, you’ll be lucky because your original bank will hold your mortgage for more than a month. This can be frustrating, especially when deciding where to send your first mortgage payment. Or when trying to do your taxes and receiving multiple 1098 forms.

That’s why you need to be especially careful when buying a home with a mortgage or refinancing your existing mortgage. The last thing you want to do is miss a monthly payment right away.

So keep an eye out for the loan ownership change form in the mail shortly after your mortgage closes.

If your loan has been sold, it will show the contact information for your new loan servicer, as well as when their first payment is due.

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