
Portfolio Lender
A portfolio lender is a bank or other financial institution that originates mortgage loans and then keeps the debt in a portfolio of loans. A portfolio lender generates fees from originating mortgages and profits from the net interest rate spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio. A portfolio lender generates fees from originating mortgages and profits from the net interest rate spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio. Buyers who want a mortgage to purchase an investment property or jumbo loan could consider working with a portfolio lender rather than a traditional mortgage lender. A portfolio lender is a bank or other financial institution that originates mortgage loans and then keeps the debt in a portfolio of loans.

What Is a Portfolio Lender?
A portfolio lender is a bank or other financial institution that originates mortgage loans and then keeps the debt in a portfolio of loans. Unlike conventional loans, a portfolio lender's loans are not re-sold in the secondary market.
A portfolio lender generates fees from originating mortgages and profits from the net interest rate spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio.





How Portfolio Lenders Work
There are pros and cons to both methods. Traditional mortgage lenders avoid the risks of holding mortgages; they profit from origination fees and then sell the mortgages to other financial institutions. Companies that profit from originating mortgage loans experience less risk and a more consistent profit stream. On the other hand, portfolio lenders experience more upside on their portfolios but also more risk.
Accordingly, this type of lender is not beholden to the demands and interests of outside investors or other third parties. Portfolio lenders set their borrowing guidelines and terms, which may appeal to specific borrowers. For example, someone who needs a jumbo loan or is buying an investment property might find more flexibility in working with a portfolio lender.
Advantages of Portfolio Lender Loans
Loan Approvals
Prospective homebuyers may find it easier to qualify for a mortgage loan from a portfolio lender than a traditional lender. This is because portfolio lenders do not have to meet underwriting guidelines specified by secondary market buyers like Fannie Mae or other agencies. For example, a traditional lender may be restricted to originating loans that meet minimum income requirements set by the secondary buyer. Since a portfolio lender keeps loans on their balance sheet instead of selling them, they have more flexibility in setting their approval criteria.
Portfolio lenders may charge a higher interest rate than traditional lenders.
Greater Flexibility
Portfolio lenders are often small, privately owned community banks that have more flexibility than larger financial institutions. For instance, when a portfolio lender is originating a mortgage, they could change several loan terms to fit the customer’s financial circumstances. They might allow the customer to make two monthly repayments instead of one monthly payment or require a smaller down payment.
Investor Friendly
Mortgages offered by portfolio lenders are typically more favorable to property investors. Usually, they do not restrict the number of properties an investor can purchase. They also don’t require a property to be in a particular condition to offer finance. This is advantageous for investors who want to buy an old home to renovate. On the other hand, a traditional lender may not finance more than five investment properties or may only approve mortgages on homes that are structurally sound.
Disadvantages of Portfolio Lender Loans
Prepayment Fees
Portfolio lenders may charge borrowers a prepayment fee. Although federal law limits the amounts lenders can charge, this can be an unexpected expense that increases the overall cost of the loan. Before a customer originates a loan with a portfolio lender, they should negotiate prepayment fees that allow for an easier refinance.
Higher Interest Rates
A portfolio lender may charge higher interest rates to offset the additional risk they take for servicing the loan. If the Federal Reserve is increasing interest rates, a portfolio lender may increase their variable rates more rapidly to maintain their profit margins.
Related terms:
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Conforming Loan
A conforming loan is a home mortgage with underlying terms and conditions that meet the funding criteria of Fannie Mae and Freddie Mac. read more
Installment Debt
Installment debt is a loan repaid by the borrower in regular payments. Read about different types of installment debt, along with their pros and cons. read more
Interest Rate , Formula, & Calculation
The interest rate is the amount lenders charge borrowers and is a percentage of the principal. It is also the amount earned from deposit accounts. read more
Investment Property
An investment property is purchased with the intention of earning a return either through rent, future resale, or both. read more
Jumbo Loan
A jumbo loan—another name for a jumbo mortgage—is a type of financing that exceeds the limits set by the Federal Housing Finance Agency. read more
Mortgage
A mortgage is a loan typically used to buy a home or other piece of real estate for which that property then serves as collateral. read more
Net Interest Rate Spread
The net interest rate spread is the difference between the average yield a financial institution receives from loans, along with other interest-accruing activities, and the average rate it pays on deposits and borrowings. read more
No Documentation (No Doc) Mortgage
A no documentation mortgage is granted without supporting evidence of borrower income but on a declaration confirming they can make payments. read more
Profit Margin
Profit margin gauges the degree to which a company or a business activity makes money. It represents what percentage of sales has turned into profits. read more