If you want to buy a home but can’t qualify for a conventional or government-backed mortgage loan, you may feel like homeownership is out of reach. Maybe you’ve recently experienced a major change in your life, such as moving from a 9-to-5 job to self-employment, so you’re having trouble finding a lender. Fortunately, alternative financing exists to help people in your position become homeowners, including portfolio loans.
More information: Types of mortgage loans
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In many cases, the mortgage lender who originated your loan sells it to a government-sponsored enterprise (GSE), such as Fannie Mae or Freddie Mac, to generate new funds. But portfolio loans work differently. When you take out a portfolio loan, the lender keeps it on its books rather than selling it on the secondary market. Portfolio mortgages are not backed by the government (like FHA, VA, and USDA loans) and are typically underwritten, issued, and serviced by a private lender.
A portfolio mortgage works similarly to a traditional mortgage in that you must apply for the loan, meet the eligibility criteria, go through closing, and make monthly payments as agreed upon. However, since 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 rejected under traditional underwriting guidelines,” said Jennifer Beeston, senior vice president at Rate (formerly Guaranteed Rate), per email.
Beeston recommended doing your research and meeting with several loan officers to see your options for your particular situation. Doing so will help you feel confident that you are working with an expert and get the best deal possible.
Read more: Best mortgage lenders for bad credit.
Portfolio loans are not standardized, so there are no consistent borrowing requirements from one lender to another. However, Andrea “Bella” Bellony, CEO of home buying company Bellonys, said via email that the following qualification criteria are common:
Your lender may also charge more to offset the added risk of issuing a loan that may not meet traditional underwriting requirements. Your interest rate and closing costs may be higher than a conventional mortgage. Additionally, you could be subject to a prepayment penalty if you pay off the debt early.
More information: How does the mortgage underwriting process work?
“Once you’ve done your research, I would suggest getting pre-approved by your two main loan officers and getting fully underwritten,” Beeston said. “Ask them to review rates and fees and really spend the time explaining 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 fight back to get a good deal. “Try to negotiate the early termination fee to allow you to refinance at a later date.” [traditional] loan in the future without having to pay too large a prepayment penalty,” suggested Randall Yates, co-founder of the VA Loan Network, via email.
Read more: How a mortgage prepayment penalty works
4. Finalize the loan and enter the payment.
If the bank approves your request, you will obtain a closing authorization. Like any mortgage, you’ll sign the paperwork on closing day, make your down payment, and finalize the transaction. You will soon receive your first mortgage statement.
Go deeper: House Closing: What to Expect and How to Prepare
Like any financial product, portfolio loans have advantages and disadvantages. Here are some of the main ones:
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Potential access to financing when you can’t qualify for a traditional mortgage
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You can start building capital and hopefully improve your financial situation.
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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 types of mortgages
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A higher down payment is generally required
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You may need significant cash reserves or assets to qualify
More information: How to generate value in your home
“Portfolio loans are like personalized financial solutions for those who don’t meet the usual requirements,” Yates said. “I find these loans essential for some people who are often overlooked by traditional lenders, such as new self-employed people, people with bad credit, or those who need more than the usual loan limits.”
Bellony said a portfolio loan may be right for you if you’re trying to get back on your feet after a bankruptcy or divorce. This type of mortgage could also work if you have significant assets rather than verifiable W-2 income.
However, if you can qualify for a traditional mortgage, you’ll probably want to stay away from portfolio loans. Conventional and government mortgage loans tend to be cheaper because they are less risky for the lender.
Go deeper: How Bankruptcy Affects Maintaining and Buying a Home
According to data from the Urban Institute, portfolio loans accounted for more than 31% of mortgage originations in the third quarter of 2024. Beeston said the current (and future) popularity is due to several factors, including rising mortgage prices. housing resulting in jumbo loans (which the GSEs generally do not purchase) and an increase in the number of self-employed professionals.
Yes, you can refinance an existing mortgage and convert it to a portfolio loan. It may make sense to do so if you have the opportunity to get a lower interest rate but don’t have recent tax documentation that meets traditional underwriting guidelines. In that case, your lender could issue the loan based on bank statements or other documents that demonstrate your ability to repay the debt.
Not all banks offer portfolio loans. Typically, portfolio mortgage lenders are credit unions or smaller local banks. You can also get a loan through an online bank, such as Axos Bank.
This article was edited by Laura Grace Tarpley.