Portfolio Loans Are Privately Held

Many have preconceived notions about portfolio loans. Primarily, this is directly attributed to the recent mortgage catastrophe and consequential bailout. Ever since the subprime lending mess, many people now look differently at loans that do not fall into the “traditional” category. Given the fact that portfolio loans are a little different than the average loan, people tend to put a negative connotation on them and assume they are risky. However, despite popular opinion, portfolio loans are not naturally risky and prove to be a smart solution when a situation calls for one. To disprove some of these preconceived notions, let’s define the components of a portfolio loan.

Simply stated, a portfolio loan is a loan that is secured within the lender’s portfolio. That is, they will not be sold or traded to other lenders and will remain to be managed by the lender who issued the loan. This results in a significant fallacy. One generally assumes that if the lender is not selling the loan, then the borrower must be a bad candidate. However, this is not true. And to assume that all portfolio loans are either risky or should not be issued at all, is an unwarranted concern.

There are many reasons as to why one may be given a portfolio loan. These are all based on the factors that are unique to the borrower’s current situation and in some cases a portfolio loan is in the better choice for both the borrower and lender. A prime example would be a scenario where a bank considers the borrower’s current financial status as risk, therefore denying the borrower a traditional mortgage.

Contrary to what some believe, acquiring a portfolio loan is not bad route to take. In fact, if the loan is for a practical reason, the borrower may be approved for a portfolio loan despite being declined by the bank. The bottom line is that a portfolio loan is definitely an option worth considering.

Here’s an example. If a person is presented with the opportunity to buy two houses within an area that is perfect for a new development of condos. This may cause the value of the two homes to drastically increase in a short amount of time. But, if the person doesn’t have the cash to put a considerable amount of money down on the homes, then they will most likely be denied a loan from the bank.  However, a portfolio lender might not have trouble providing a loan to a person that has no money to put down.

Also note that portfolio lenders were unharmed by the recent mortgage crisis. Nevertheless, the portfolio lender will provide the borrower with a portfolio loan to help make the purchase of both properties a little easier. As a result, the investment moves forward smoothly and the borrower is able to take advantage of the opportunity. Are there any risks? Naturally there is some risk associated with this process, but there is potential for substantial revenue too.

Without the issuance of portfolio loans, the real estate market could have gone dry. With anticipation, an increasing number of people will begin to take advantage of these unique loans, therefore replacing the traditional lender.

Tags: Portfolio Loans