If you are a homeowner with unconventional income or a unique property to finance, you may be feeling left out of the refinancing boom and frustrated that you have been unable to take advantage of the lowest mortgage rates. Borrowers with credit problems often turn to FHA loans because of their looser qualification guidelines, but you may want to avoid the high mortgage insurance requirements of those loans, particularly if you have five or ten percent or more in home equity, enough to qualify for a conventional refinance. Conventional loan requirements, however, are more rigid and don't always accommodate unusual financial circumstances.
The solution for some homeowners is a portfolio loan. A portfolio loan refers to a mortgage that a lender keeps in-house rather than sells on the secondary loan market. While most of the larger banks sell all of their loans to Fannie Mae and Freddie Mac, smaller regional and community banks and credit unions often keep at least some of their mortgage loans on their books. The big advantage to borrowers of a portfolio loan is that the lender is more likely to use individualized underwriting to determine whether you qualify for refinancing.
Portfolio loan qualifications
While lenders can be more lenient with borrowers who are applying for a portfolio loan, these loans are not the same as subprime loans that were once available to borrowers with bad credit. In fact, because the lender will be keeping your loan in-house, this means the lender assumes more risk and will scrutinize your ability to repay your mortgage even more carefully.
The individualized attention, as opposed to automated underwriting, means that, if your credit score is low, you may still qualify for a loan if you have a good explanation of why your score is low and have compensating factors such as 25 percent or more in home equity or significant cash reserves in the bank that allow the lender to feel confident that you will repay the loan.
If you have fluctuating income from your own business or because you earn money primarily through commissions and bonuses, a refinance with a portfolio loan may be easier to qualify for than a conventional mortgage loan.
Evolving mortgage rules
Two changes will potentially impact your ability to qualify for a mortgage refinance guaranteed by Fannie Mae or Freddie Mac in 2014. Lenders will now be required to meet specific guidelines for a "qualified mortgage" including a debt-to-income ratio capped at 43 percent. If your income is difficult to verify but you have sufficient assets in the bank, a portfolio loan may be your only option next year.
Another potential change in 2014, but not yet approved by Congress, is that loan limits for conforming loans may be lowered. Mortgage loans above the limit, known as jumbo loans, are always portfolio loans because Fannie Mae and Freddie Mac won't buy them. If limits are lowered, this could mean that more borrowers will need to turn to jumbo loan financing.
If you're considering a home refinance, shop around with several lenders and ask them about their portfolio loan options.