If you want to buy a home but can’t qualify for a traditional or government-backed home loan, home ownership can feel out of reach. Maybe you’ve recently made a big life change, like switching from a 9-to-5 job to self-employment, so you’re struggling to find a lender. Fortunately, alternative financing exists to help people in your situation become a homeowner — including portfolio loans.
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In many cases, the mortgage lender that originates your loan sells it to a government-sponsored enterprise (GSE), such as Fannie Mae or Freddie Mac, to generate new funding. But portfolio loans work differently. When you take out a portfolio loan, the lender keeps it on its books instead of selling it on the secondary market. Portfolio mortgages are not government-backed (such as FHA, VA, and USDA loans) and are typically underwritten, issued, and serviced by a private lender.
A portfolio mortgage works just like a conventional mortgage in that you must apply for the loan, meet eligibility criteria, go through closing, and make the agreed-upon monthly payments. However, because portfolio lenders hold these loans, they are not governed by GSE requirements. As a result, lenders “…can create their own guidelines and often make exceptions and approve loans that would be denied with traditional underwriting guidelines,” said Jennifer Beeston. Rate (Previously Guaranteed Rate)via email.
Beeston recommends researching and meeting with several loan officers to see their options for your unique situation. Doing so will help you feel confident that you are dealing with an expert and secure the best possible deal.
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Portfolio loans are not standardized, so there are no consistent lending requirements from lender to lender. However, Andrea “Bella” Belloni, CEO of home-buying business Belloni’s, said via email that the following eligibility criteria are common:
Your lender may charge more to cover the additional risk of issuing a loan that may not meet traditional underwriting qualifications. Your interest rate and closing costs may be higher than with a conventional mortgage. Also, you may incur a prepayment penalty if you pay off the loan early.
learn more: How does the mortgage underwriting process work?
“Once you’ve done your research, I would suggest getting pre-approved and fully underwritten with your top two loan officers,” Beeston said. “Ask them to go through the rates and fees and spend time learning exactly what to expect and the pros and cons of the loan product they suggest.” Then, you can choose the best option.
Don’t be afraid to advocate for yourself to get a good deal. “Try to negotiate an early pay-off fee to allow you to refinance into one [traditional] Loan down the line without coughing up too much of a prepayment penalty,” suggested VA Loan Network co-founder Randall Yates via email.
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4. Finalize the loan and submit the repayment
If the bank approves your application, you will receive a clear-to-close. Like any other mortgage, you’ll sign the paperwork, make your down payment, and finalize the transaction on closing day. Soon, you will receive your first mortgage billing statement.
Dig Deeper: Closing on a home — what to expect and how to prepare
Like any financial product, portfolio loans have pros and cons. Here are some of the main ones:
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Potential access to financing when you may not qualify for a traditional mortgage
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You can start building equity and hopefully your financial situation will improve
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A stable relationship with the same mortgage lender throughout the term of the loan
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Potentially higher interest rates and fees than other mortgage types
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Usually a high down payment is required
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You may need significant cash reserves or assets to qualify
learn more: How to build equity in your home
“Portfolio loans are like custom-fit finance solutions for those who don’t tick the usual boxes,” said Yates. “I see these loans as essential for certain people who are often passed over by traditional lenders — such as the newly self-employed, people with poor credit, or people who need more than normal loan limits.”
Belloni said a portfolio loan might be right for you if you’re trying to get back on your feet after bankruptcy or divorce. This mortgage type can also work if you have significant assets rather than certified W-2 income.
However, if you can qualify for a conventional mortgage, you’ll likely want to avoid portfolio loans. Conventional and government home loans are cheaper because they are less risky for the lender.
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According to data from the Urban Institute, portfolio loans accounted for more than 31% of mortgage originations in Q3 2024. Beeston said the current — and future — popularity is due to several factors, including rising home prices resulting from jumbo loans (which GSEs typically don’t buy) and the self-employed. An increase in the number of professionals
Yes, you can refinance an existing mortgage into a portfolio loan. It may make sense to do this if you have a chance to secure a lower interest rate but don’t have recent tax documents that meet traditional underwriting guidelines. In that case, your lender may issue a loan based on bank statements or other documents that prove your ability to repay the loan.
Not all banks offer portfolio loans. Typically, portfolio mortgage lenders are small local credit unions or banks. You may also be able to secure a loan through an online bank, such as Exos Bank.
This article was edited by Laura Grace Tarpley.
