Portfolio Loans go by a number of different names - portfolio mortgages, non-QM, non-traditional, non-conventional, portfolio, specialty products, or a few other creative variations.
A Portfolio Loan is a mortgage product that Freddie Mac, Fannie Mae, and FHA determined does not meet their risk guidelines, but other investors are willing to lend money to. Although Portfolio Loans are not as common, they allow home buyers with unique situations to qualify to buy a home.
How do Portfolio Loans differ from a regular mortgage?
Traditional mortgages have guidelines in order to reduce the risk in the eyes of the government. The guidelines borrowers must reach make it less likely a borrower will default on their mortgage, which would result in the investor losing money and the borrower losing their home. When products go outside of these guidelines, they’re determined to be a higher risk. Portfolio products deal with this higher risk by requiring that the borrower have more “skin in the game” in the form of higher down payments.
Portfolio Loans products will typically allow for exceptions to commonly understood “rules” of mortgages. These exceptions could include how your income is verified, what negative events are acceptable, and residency status.
Since Portfolio Loans are unique products for unique situations, the risk is much higher for the lenders. And with a higher risk for those lending the money, the mortgage will have a higher interest rate and require a larger down payment. Your loan officer will likely pursue all other options with you before moving forward with a Portfolio Loan.
Who is considered a high-risk borrower?
Home buyers with a higher risk - those who don’t qualify for a traditional mortgage - will have trouble finding mortgage options. Generally speaking, traditional mortgages will want at least a 3-5% down payment, decent credit, more than two years of job stability, and your housing expense to be below 43% of your monthly debt-to-income (DTI).
Meeting the requirements for a traditional mortgage isn’t always possible for home buyers for a variety of reasons. Those with commission fields and self-employment will commonly have issues. What the mortgage industry defines as higher risk can be perfectly manageable for many people, or the risk is due to something that was completely outside their control.
In order to reduce this risk, it’s common to see minimum down payments on portfolio products range from 10 - 25% down depending on your particular scenario.
Who would want to use a Portfolio Loan?
There are three main situations where a borrower at higher risk would possibly use a Portfolio Loan:
1. Those who previously invested their money: When switching industries or switching from fix and flip to long-term rentals, it can be difficult to show you have the income necessary to qualify for a mortgage. But courtesy of your previous investments, you’re able to make the 25% down payment. These types of investors will find a Portfolio Loan product a good fit for them as they’re able to use something like the projected rental income from their new investment to qualify for the mortgage. As long as the rental will be self-sustaining, your credit is decent, and you can make a 25% down payment, you may be eligible for an Investor Product.
2. Major derogatory credit events: Foreclosures and bankruptcies can be a serious issue for many borrowers. Especially so when the event was caused by someone else failing to make mortgage payments, which can be more common in divorces. But foreclosures and bankruptcies happen for many reasons. At the end of the day, if you’re able to save up 10 - 25% (the down payment varies depending on your credit score) after a major derogatory event, you could qualify for a portfolio product the day after one of these major events. While the rates and fees are higher, you’ll be able to continue investing in yourself and then within a few years, you could refinance into a traditional mortgage product.
3. If you are a foreign national: Although this is less common than the two other situations, you’re just as likely to come across barriers to property investment. Foreign nationals will likely have trouble getting a mortgage in the United States. However, Portfolio Loans can help borrowers in this situation have the same opportunity for one of the best investments most people will make in their life.
Does NewCastle Home Loans offer these products?
In very unique situations after all other mortgage options have been exhausted, one of our loan officers can look into Portfolio Loan options for you.
For example, a mutual client of mine and Nicole Ramirez was recently having trouble qualifying for their new home purchase due to some derogatory events in their past. Their credit was in the mid 500s, and there were late mortgage payments from just over one year ago. However, the borrower had substantial savings and a great job now. They were able to secure their new home with a 25% down payment and are excited to be moving into their new home.
You should explore all other options before looking into Portfolio Loans.
As mentioned above, these loans are seen as a higher risk product. Due to this, these loans are kept in “portfolio” as the primary mortgage investors aren’t willing to buy these. This increases the cost of a mortgage for the company that funds them. In order to be able to continue offering these products, the investment from the borrower must be higher.
This higher investment will be seen in three different areas for a mortgage:
- Higher down payment: Typical down payments for these products are 10 - 25% depending on your scenario.
- Higher interest rate: Rates on these products will typically be 2-4% higher than current market rates.
- Higher closing costs: On average, closing costs are about 3-4% of the cost of the mortgage for a portfolio product. These can be partially reduced by Lender Credits.
Before considering one of these products, it’s best to explore all other options with your loan officer to ensure that you’re getting the best possible terms for your loan. While it is possible to refinance these products within a few years once you had traditional qualifications, it’s always best to get the best deal possible the first time around. If you have questions about what options you might have, send me an email at firstname.lastname@example.org to discuss further. You might be shocked to find out there are other loan options out there for you with a little work.