A portfolio loan is when a lender keeps a loan on their books instead of selling it to a third party. For real estate, this means a lender keeps the mortgage instead of pawning it off on a federal insurer such as Fannie Mae.
What are the stakes of a portfolio loan?
When a mortgage lender sells the mortgage to Fannie Mae, they are offloading the risk to Fannie. If the lender keeps the loan on their own books, they assume all the risk. This comes into play if the person taking out the mortgage defaults.
Why would a lender give out a portfolio loan?
It’s reasonable to wonder why a mortgage lender would give out any portfolio loans if they’re riskier than those Fannie Mae backs.
The problem is that Fannie Mae will not back all mortgages. In fact, Fannie Mae maintains the most stringent requirements among lenders for mortgages.
Therefore, a lender may dole out a portfolio loan if Fannie Mae won’t back it but the lender still believes the mortgage owner will make good on the loan.
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When does portfolio lending take place for condos?
Portfolio loans typically start when a condo has sold 35% of its units. At this point, the lender can be reasonably confident the project will succeed. However, it’s still too early for Fannie Mae to back a loan. Fannie will only do that once the condo has sold 50% of its units.
In addition, Fannie Mae only backs loans below a certain price. For 2021, this number in NYC is about $822,000. This is the conforming loan limit. For jumbo loans, any mortgages exceeding the conforming loan limit, a bank cannot get Fannie’s backing. Enter the portfolio loan.
Are conditions for these loans stricter?
Yes, lenders typically maintain tougher rules for portfolio loans than for loans they will sell to Fannie Mae and its counterparts. This is because the risk level is higher.
Tougher rules may include more scrutiny of the project in which the prospective buyer wants to own a condo. The lender may also want a higher down payment or stronger financials.
Loans Fannie doesn’t back may also come with higher interest rates.
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Top photo courtesy of Madison House.