What is a Portfolio Loan?
My clients ask me all the time, “What is the difference between a FNMA* loan and a Portfolio loan?” A FNMA loan can be a portfolio loan, but a Portfolio loan is not a FNMA loan.
Here is the difference…
A FNMA loan must adhere to FNMA guidelines; these guidelines are dictated by the Federal government and come straight out of Washington D.C. Mortgage originators (like me) are held to these guidelines so the FNMA compliance allows for the loan to be sold on the secondary market. That means no one, specific lender has to hold the loan on their books; it can be sold to any FNMA servicer. The ones you have heard of are the big boxes, like Wells Fargo, Chase, and Bank of America. If a big bank wants to get out of the mortgage business, FNMA compliance provides a guaranteed new home for these loans.
So we know what a FNMA loan is, and a Portfolio loan is what FNMA is not. A loan that does not fit the FNMA template can be considered by a bank to “portfolio.” This means there is some redeeming quality about the loan that the lender likes enough to take the risk. The redeeming quality is usually plenty of reserves, money in the bank, or staying power. Portfolio loan terms are not as appealing as the FNMA loan terms, but it gets the borrower the house. Portfolio loans are typically short term loans; this means no 30-year amortization. The only time a portfolio lender will issue a 30-year amortization is if the loan is an ARM (Adjustable Rate Mortgage.) If the amortization structure is short term, then the lender is in a position to re-qualify the borrower more frequently and reevaluate the risk. Some portfolio lenders will allow for a fixed rate loan, but the amortization typically does not exceed 15 years. Most of the time a portfolio loan is required is when a self-employed borrower shows less than actual income with plenty of deposits in the bank. The portfolio loan is similar to the old school “bridge loan.” It gets the borrower in the house and allows you time to fill in the gaps that FNMA did not like.
It is very comforting to know that your FNMA lender has a Portfolio Plan B.
*Federal National Mortgage Association; colloquially known as Fannie Mae