What Exactly is a ‘Portfolio’ Loan?

Written by Posted On Thursday, 09 March 2023 00:00

Most mortgage loans today fall into either the conventional or government-backed category. In fact, nearly two out of three residential mortgages issued today fall into the conventional file cabinet with government-backed mortgages following behind. When you think of ‘government-backed’ loans, think VA loans and similar types. 

Most conventional loans today are approved using pre-established approval guidelines. When a residential mortgage is approved using these standards, the loan is then eligible for sale in the secondary markets. Sometimes consumers can get a bit apprehensive when they get a ‘goodbye’ letter in the mail letting them know the mortgage they’ve been paying on is going to be sold to some other entity. 

In fact, at the initial settlement table, there is a document the lender provides that you must sign and/or initial that lets the borrower know what percentage of loans the lender makes that are eventually sold. Sometimes borrowers forget about that but in reality it’s nothing to be concerned about. The terms of the original mortgage doesn’t change. The new entity doesn’t have the authority to make such changes.

Yet having the ability to sell a mortgage loan is essential in keeping a healthy mortgage market. If you think about it for a moment, it makes sense that a mortgage company wants to sell your loan. Without having the ability to sell a loan, soon the lender runs out of money to lend. Mortgage companies operate with a line of credit and use that line of credit to fund home loans. When the loan is sold, the credit line is replenished, allowing the lender to continue to make still more home loans. 

But what about loans that aren’t sold to anyone? What about those loans that a lender makes and keeps in its ‘portfolio?’

Portfolio loans are a thing. They provide an important niche in the mortgage industry. A loan is labeled ‘portfolio’ because the loan is kept with the initial lender. Such loans fall outside the guidelines of conventional or government-backed mortgages and typically cater to a specific mortgage market.  Loans issued to physicians might have a portfolio loan designed specifically for them. Brand new doctors can have quite a few outstanding college loans but the lender recognizes the earning potential for a still wet-behind-the-ears doctor. There are other groups that can fall into the portfolio category, too.

Portfolio loans are part of the universe of home loan programs and are an integral part of real estate finance.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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