Though selling loans on the secondary mortgage market is common, there’s no rule that lenders must sell loans. Instead, lenders with lots of cash, typically banks, can originate mortgages and simply hold them. Such loans are called portfolio loans because they’re kept as the lender’s asset — part of their portfolio.

When a loan is held in a portfolio it means the lender can establish its own approval standards instead of conforming to the requirements for selling loans on the secondary market. Instead, the lender can simply adopt conforming loan standards or it might have its own requirements. The lender might, for example, be willing to accept loan applications with lower credit scores or bigger monthly payments.

Fannie Mae, Freddie Mac and conforming mortgages

Fannie Mae and Freddie Mac only purchase conforming mortgages from lenders, which are loans that meet their standards. Those standards include such things as a maximum loan size, debt-to-income ratio (DTI) and loan-to-value ratio (LTV).

Many other mortgage buyers also use the conforming loan standards, so if you cannot meet these requirements, you’ll have to find other lenders with less strict requirements.

With rising interest rates, monthly payments are growing more expensive, which can make it difficult for borrowers to meet debt-to-income requirements. In the first quarter of 2023, the total national household debt rose by 0.9 percent, according to the Federal Reserve Bank of New York. The average mortgage payment also increased 28.7% between early 2022 and early 2023, according to the Mortgage Bankers Association.

Increased financial stress can make a portfolio loan, which may have less strict requirements for debt-to-income ratios, appealing.

Pros of portfolio lenders

Portfolio lenders can be appealing to borrowers for reasons including:

Easier underwriting

The primary draw of portfolio lenders is that they aren’t beholden to the requirements of conventional mortgages. You might be able to qualify for a loan with a portfolio lender even if you don’t meet typical requirements.

Flexible terms

Because loans don’t have to conform to typical standards for sale on the secondary market, portfolio lenders can be more flexible. They can offer unusual repayment terms, larger loans, smaller down payments and other customizations to meet their borrowers’ needs.

Less servicer uncertainty

Many portfolio lenders choose to own and service the loans they originate. Having a lender sell your loan to a new servicer can be a hassle, so not having to deal with this happening, potentially multiple times, can save you some annoyance.

Cons of portfolio lenders

Portfolio lenders aren’t perfect for every situation. Some cons include:

Higher costs

One benefit of the standard requirements for loans is that lenders take on less risk and can sell their loans to reduce risk further. Because portfolio lenders hold their loans through maturity, they accept higher risk and may charge higher rates and fees.

Prepayment penalties

Prepayment penalties, a fee charged if you pay your loan off ahead of schedule, are common with portfolio loans. You’ll owe this fee if you move before paying off your loan within a stated period or possibly if you choose to make additional payments.

How to find a portfolio mortgage lender

Unlike many mortgage products, portfolio loans are not especially promoted, or in many cases, promoted at all. Keep in mind:

• You’re more likely to get a portfolio loan if you’ve been a long-time bank or mortgage customer or the lender wants your business.
• A portfolio lender may be willing to take a chance with you, but in exchange for the additional risk it may also want a higher rate or bigger up-front fees. Still, that may be a better opportunity than no new loan at all.

As always with mortgage financing, not all loans work for all borrowers. If a loan has a low interest rate but requires big fees up front it may not be a good deal, so always compare the APR, which includes these costs. If you expect to move in the next few years, refinancing may not be a good financial option if you cannot recover your costs in that time. Run the numbers before making any decisions.

You’ll need to shop around to find a portfolio loan. Ask lenders, title companies and real estate agents about portfolio financing. Keep in mind that sometimes portfolio lenders call themselves direct lenders. There are hybrid lenders, too, selling some loans to Fannie and Freddie and keeping other loans on their books.

Bottom line

If you’ve got irregular income or fall outside the conforming mortgage requirements, consider beginning your mortgage search with portfolio lenders. Mortgage brokers can be especially helpful in putting you in touch with lenders that make these loans.