For people who are looking for a mortgage for a home but cannot obtain traditional financing, there are a few options outside the traditional realm of mortgages where borrowers can still obtain mortgage financing. One of those options is known as a portfolio mortgage or a portfolio loan. Unlike a traditional mortgage lender, a portfolio mortgage lender is usually a smaller lender, bank or mortgage company that will continue to manage and hold a mortgage after the initial mortgage is commenced.
Understanding Long Term Mortgage Basics
Many borrowers are unfamiliar with how traditional mortgages work after they complete the closing on their home. This can be especially true with first time home buyers. Most mortgages today are sold after the home purchase is completed to a large mortgage company and management firm. These mortgages are sold into what is called the “secondary mortgage market”.
The new buyer of the mortgage is the company that will manage the mortgage long term. Many borrowers become uncertain after their first home purchase when they realize their payments start to go to another company after the first six months. This is very common and happens when the primary mortgage sells in the secondary mortgage market to another company. The new company will usually hold the mortgage for the life of the loan but could resell it down the road.
To be eligible for selling on the secondary market, almost all primary mortgages have a list of guidelines that must be met. By contrast, a portfolio lender holds a loan in house and continues to manage the mortgage loan long term. This allows the lender to have more flexibility in the types of people they approve for a home loan.
Portfolio mortgages are a great option for people who have a few glitches on their credit history but are qualified buyers in every other capacity. Some of the primary reasons people choose to use a portfolio lender for a mortgage are people who:
- Have Credit History Glitches
- Self-Employed Borrowers
- Have Little Credit History
- Are Looking for a Short-Term Mortgage
- Are Buyers Looking to Buy, Remodel and Flip a Home
- Have Some Type of Tax Lien
- Need a Second Home Mortgage
- Have Income Verification Concerns
- Have Employment History Glitches Barring Them from Traditional Mortgage Approval
- Currently have Higher Income to Debt Ratios
- Are Buying a Home That Needs Extensive Repairs
- Have High Student Loan Debt
- Have Old Debt or Old Bankruptcies
In each of these cases, the borrower may not be able to acquire a standard home mortgage. However, these people are capable of making the necessary mortgage payments on the home they wish to buy. Portfolio lenders treat each portfolio loan application on an individual basis and make an approval after considering many factors.
Basic Facts for Portfolio Mortgages
Portfolio mortgages require a 10-25% down payment to be approved. Some of the down payment money can come from a gift. Mortgage interest rates for portfolio mortgages are higher than traditional mortgages because the risk of default is higher for portfolio loans.
A portfolio mortgage loan is a good borrowing option for people who are buying a home that generally could not be approved for traditional financing. This may be because the house has needed repairs, or the borrowers are in the process of rebuilding their credit but their credit score is insufficient for a traditional loan. In many cases, these borrowers have the necessary capital to purchase the home but have other mitigating factors that impede a traditional mortgage approval process.