Portfolio Lender

What Is A Portfolio Lender?

A portfolio lender is a bank or other financial institution that grants mortgage loans to customers and holds the loan in its portfolio instead of selling them to the secondary market.

Deeper Definition

Traditionally, when customers request a mortgage loan from a bank, they finance it using their own money. Afterward, they sell the loan portfolio at a marketplace known as the secondary mortgage market to recoup their funds. A portfolio lender grants mortgage loans the same way banks and other financial institutions do – using their own money. But rather than sell the loan portfolio at the secondary mortgage market, they keep the loans on their books.

Portfolio lenders are typically local or community banks with more flexible lending standards than national banks. Most national banks set strict loan terms and conditions because they sell the loans secondary mortgage market, and for sale to go through, it must meet specific guidelines. Portfolio lenders do not need to follow those guidelines when approving loans since they don’t sell their loan portfolios. As a result, they can make approval decisions based on the answers to a borrower’s application.

There are some advantages to taking a loan from a portfolio lender; they include:

Easy approval: Prospective homebuyers are likely to qualify for a loan from a portfolio lender than a traditional lender. Due to stringent requirements set at the secondary mortgage market, traditional lenders are selective of the loans they grant. Since portfolio lenders keep loans on their balance sheet instead of selling them, they are flexible with their approval criteria. 

Personalized loans: Portfolio lenders are local or community banks that invest in building relationships with members of their community.

As a result, they may change some loan terms to fit the customer’s financial circumstances.

Portfolio Lender Example

Raphael wants to get a mortgage loan but has not had any luck with national banks because his expenses consume a significant percentage of his income than the banks allow. Raphael decides to try his luck at a community bank known as a portfolio lender. The portfolio lender reviews his application and grants him the mortgage despite that his credit is not perfect. 

Despite his issues, the portfolio lender could grant Raphael a loan because they keep the loan on their balance sheet. On the other hand, the national banks could not because they have to sell the loan at the secondary mortgage market to recoup their funds, and for sale to be successful, it must meet specific guidelines which the market sets.