A whole loan is a form of debt financing where the original lender extends a loan to a single borrower and is typically intended to be held for a fixed period of time. Unlike conventional mortgages, a single loan encompasses all aspects of financing without the need to divide and sell the debt on the secondary market. A whole loan provides a straightforward approach to funding and repayment for borrowers.

Whole loans are generally amortized, meaning that each payment goes toward both the principal and the interest, making it easier for lenders to predict the amount of their returns. As the loan term reaches maturity, the lender must decide whether to offer a renewal of the loan or to close it, meaning that the payment must be made in full.

Because the funds are provided in one loan and not sold off, the benefits of gaining more money back in the short term are overshadowed by increased risk. While the lender typically receives a steadier stream of cash flow due to the presence of one borrower, unanticipated events, such as bankruptcy or a payment default, can result in the lender experiencing more significant losses.

Despite the aforementioned potential drawbacks, a whole loan may be beneficial to a lender if they choose to sell the loan on the secondary market. This option allows the lender to reduce their risk by transferring the whole loan to an institutional buyer, such as Freddie Mac or Fannie Mae, that specializes in providing debt financing.

The sale of a loan on the secondary market may allow a lender to receive their principal almost immediately. And in the event of a borrower defaulting on the loan, the original lender can transfer the associated risk to the new buyer without upsetting the borrowers’ relationship.

In summary, a whole loan is a single loan provided to a borrower that can be held by the lender or sold on the secondary market. It provides a straightforward approach to funding and repayment for borrowers, and it can give lenders almost immediate liquidity if the loan is sold. While its inherent risks are greater than those posed by conventional mortgages, whole loans can be advantageous if the lender chooses to sell the loan on the secondary market.