Portfolio lending

A ‘‘portfolio’’ loan means that it is made by a lender with no intentions of selling the loan or having it underwritten to any external guidelines. Instead, the loan is made and kept in the lender’s portfolio of loans. A portfolio loan is a loan made by a direct lender, most usually a bank, that is designed to be kept in-house. Unfortunately, portfolio lending is a term that’s bandied about too often, encompassing loan programs that are nothing near portfolio. Often a portfolio loan is incorrectly described as any loan that’s not a conventional or government loan.

Portfolio loans go by their own guidelines and don’t necessarily follow loan rules established by others. Why would someone want a portfolio loan? Perhaps when their loan application doesn’t quite meet the guidelines of a conventional loan. Or when no government program will work.

For instance, let’s say you just found an apartment building with ten units and need financing. Conventional or government loans don’t cover apartment buildings, so those loans won’t work. Instead, you’ll need a portfolio loan. Or maybe you found a four-plex but had zero money for down payment. If you found conventional financing at all it might require a higher down payment or other special circumstances that youmight not find attractive. Are you a real estate investor and have so many residential properties that conventional lenders think you have one too many? Go portfolio. Where do you get portfolio loans? From your bank. Portfolio lending is more of a ‘‘common sense’’ loan that might not fit the conventional guideline, but shucks, it looks like such a great deal.

Don’t be surprised if your portfolio loan is of a shorter term or maybe a hybrid. Retail banks certainly like to make loans but they also don’t like to tie themselves into any one rate for an extended period of time. If a bank makes a portfolio loan at 6.00 percent, and then three years later rates are at 9.00 percent, they’d like to make more loans, just at the new, higher rates.