A portfolio lender is a financial institution, such as a bank or credit union, that originates and holds mortgage loans in its own portfolio rather than selling them on the secondary market. Unlike lenders who sell loans to government-sponsored entities like Fannie Mae or Freddie Mac, portfolio lenders keep the loans on their books, managing them throughout the life of the loan.
Key characteristics of portfolio lenders include:
- Loan Ownership: Portfolio lenders retain ownership of the mortgages they issue. This means they are not bound by the standards set by external entities when approving loans.
- Flexible Approval Standards: Since portfolio lenders don't have to adhere to the criteria set by external agencies, they can establish their own approval standards. This flexibility allows them to consider a broader range of factors when evaluating loan applications.
- Unique Loan Terms: Portfolio lenders can offer more flexible terms and conditions, such as larger loan amounts, smaller down payments, or unconventional repayment structures. This flexibility makes them attractive to borrowers with specific needs or circumstances.
- Risk Retention: Portfolio lenders accept the risk associated with holding loans in their portfolios. This is in contrast to lenders who sell loans, transferring the risk to the entity purchasing the loan.
- Higher Interest Rates: To compensate for the increased risk and the fact that they cannot sell the loans, portfolio lenders may charge higher interest rates compared to loans conforming to government-sponsored entity standards.
- Relationship-Based Lending: Portfolio lenders often prioritize long-term relationships with their customers. Being a customer of the bank or credit union may enhance the likelihood of loan approval.
- Local Decision-Making: Portfolio lenders may have more autonomy in decision-making, allowing for a quicker and more personalized loan approval process. This is because they are not bound by the strict guidelines imposed by external entities.
Borrowers who might benefit from a portfolio lender include those with unique financial situations, self-employed individuals, or those who do not meet the stringent criteria of government-sponsored entities. However, it's essential for borrowers to carefully compare terms, including interest rates and fees, before choosing a portfolio lender, as they may charge higher costs to offset the increased risk they assume.
