Have you heard about portfolio loans, but you are unsure if it is best for you and your financial situation? Think you know all you need to know about portfolio loans?
A portfolio loan is a fantastic financial tool to buy or refinance investment properties if you’re having difficulty securing a conventional loan or FHA alternative. Understanding how these portfolio loans work can help you extend your real estate investment portfolio or help you become a homeowner.
If you are ready to learn more about portfolio loans and how they can best benefit you, you came to the right place. In this brief portfolio loan guide, we will go over all you need to know about portfolio loans and who you can reach out to with any questions or concerns.
What Are Portfolio Loans?
Portfolio loans are financial tools you can use to buy rental properties or to refinance the ones that you already own. This portfolio loan allows you, the real estate investor, to refinance or buy many properties under one loan.
When you receive a portfolio loan, you only have to pay one monthly payment to your lender. You won’t have to pay many loans to several different lenders.
Quite simply, a portfolio loan allows you to roll up numerous properties under one loan. It allows you to leverage characteristics of each property, such as cashflow, to positively balance out other properties that may not cashflow as well – in order to obtain better loan terms.
Another added benefit of using these loans is that there is no limit to the number of assets or the amount of capital a lender can provide to you. Unlike traditional lending, portfolio lenders do not have the same limitations that most other traditional banks do.
Portfolio Loans vs. Conventional Loans
The major difference between conventional loans and portfolio loans is the eligibility criteria. Most traditional loans and government-backed loans follow a set of government standards.
Credit unions and banks underwrite these loans and qualify their borrowers by looking at their credit score and debt-to-income ratio. There are also maximum limits on the loan size you can receive and a specific minimum down payment needed.
For example, most FHA loans need 3.5% down, whereas some conventional loans require you to put down 10% to 20% down on the home’s purchase price. The standards for receiving a portfolio loan can widely differ from those requirements mandated by conventional or government-backed loans.
Depending on the lender you decide to partner with, you may be able to receive a loan with a low credit score as long as you meet their down payment requirement. Most portfolio lenders require between 10% to 25% down of the property’s purchase price in question. For a refinance, you can typically obtain an 80% loan-to-value for a rate and term refinance or, 75% loan-to-value for cashout refinances.
What Is a Portfolio Lender?
Most portfolio lenders are private mortgage lenders who regulate and approve loans with their underwriting process. The underwriting process and guidelines are usually dictated by the demand of these loans on the secondary market.
Most conventional mortgage lenders do not want to keep the home mortgage they issued to you on hand in their portfolio of financial assets.
Instead, these lenders aim to sell off their mortgages to Freddie Mac and Fannie Mae to cut their risk and generate added income.
How Do Portfolio Loans Work?
In exchange for these less stringent approval requirements, these portfolio loans come with higher origination fees and interest rates to mitigate the lender’s risk. Depending on the lender you partner with, these loans may also come with prepayment penalties and less flexibility.
Keep in mind that because a lender can select whatever criteria they want when deciding to underwrite the portfolio loan, they most likely seek a higher interest rate on the loan product. A few lenders may offer you unfair terms that can keep you in debt and make it hard to repay the loan.
Portfolio Loan Pros
Because the underwriting criteria for obtaining a portfolio loan are generally set by the individual lender and not the government. The portfolio lender has leeway in the terms set for your mortgage. This can be a huge benefit for borrowers in several different ways.
No Limit on the Loan
With a portfolio loan, there is no limit on the size of the loan. Because these loans do not need to conform to the jumbo loan limits set by the federal government, it makes it easier for you to get a significantly sized loan. If you plan on obtaining many properties, you can, under the same loan.
Smaller Down Payment
The lender has the chance to decide how much or how little they want to finance on the property in question. On average, most portfolio lenders require you to put down at least 20% of the purchase price.
The lender might not need you to purchase private mortgage insurance, which can lower your monthly payment amount. Most conventional or federally backed loans need you to have private mortgage insurance if you do not put down a certain amount of money down on the property.
Low Credit Score Considerations
A portfolio lender can decide the level of risk it wishes to take on with a borrower. This means that portfolio lenders have the ability to lend to borrowers with any credit score.
On average, most portfolio lenders like their borrowers to have a 620 for any investment or commercial property. If you have subprime credit, expect to have higher closing costs and interest rates.
Irregular Income Considerations
If you are self-employed, it may be harder for you to qualify for a traditional loan as most lenders require you to have at least two years of steady self-employment before they qualify you for a mortgage. Portfolio lenders have the flexibility to work with well-qualified borrowers with irregular incomes. Private lenders do not require personal income verification.
Best Deals for Strong Credit
Although it may sound like portfolio loans are only great for those with less than excellent credit, that is not true. Those with solid credit profiles usually receive low down payment requirements, higher debt-to-income maximums, and better rates. When a portfolio lender lends to a borrower with a strong credit profile, it helps to strengthen the lender’s overall lending profile.
Properties That Qualify for Portfolio Lending
Under a portfolio loan, you have the opportunity to purchase properties that would not traditionally receive funding under other conventional loan programs. Most traditional loans don’t allow you to buy properties as rental investment property.
For example, FHA loans only allow you to purchase properties that you would use as a primary residence. These homes must also meet specific condition criteria.
Under any conventional loan, the house must be in livable condition. So if you plan to purchase a home as a fix and flip project, you cannot do that under traditional loans.
Projects eligible for a portfolio mortgage:
- Fix and flip projects
- Multi-dwelling units
- Mixed-use allocation and commercial space
Traditional lenders typically do not like to lend on manufactured homes or homes without permanent foundations. A portfolio lender can lend on those properties without worrying about reselling the loan since the loan will be in-house.
Cons of Portfolio Lending
There are a few cons of portfolio lending that you will want to consider before you commit to signing a contract. As mentioned earlier, these loans may come with higher interest rates than a traditional loan.
This is because portfolio lenders offer a more comprehensive range of products, and they need to mitigate their risk. Borrowers with subprime credit and high debt to income ratios typically have higher interest.
Fewer Consumer Protections
As mentioned earlier, a few portfolio lenders offer unfavorable loan terms to their borrowers. One of the most significant benefits of receiving a traditional loan is the built-in protections created for borrowers.
When a lender follows the criteria set out by the government, it protects the borrower from obtaining a loan they cannot afford. Loans that do not follow these guidelines may have fewer protections. It is always best to review your contract and ask any questions or concerns you have to make sure that you understand what you sign.
Portfolio Loan Costs
Portfolio loans are fantastic financial vehicles to use because they allow you to purchase a home before the home prices increase. As you now know, these loans come with higher closing costs and interest rates, but there is no need to worry about those additional costs. You have the opportunity to refinance your portfolio loan into a traditional mortgage once you can improve your financial situation.
Upfront portfolio loan costs:
- Origination fees
- Down payment
- Closing costs
Please also note that portfolio loans typically have a release clause. For example, if you have secured a 30 Year Fixed Rate portfolio loan and want to sell one of the properties, you would be subject to release pricing. This is typically 120% of the loan amount for that specific property.
If you had 10 properties and a $1,000,000 loan, you could assign each property a loan size of approximately $100,000 each. When you sell this property, you would have to payoff $120,000. The additional $20,000 would be applied to the remaining mortgage.
For example, the original loan size was $1,000,000. You sell one property and the new loan amount would be $1,000,000 less $120,000 which is $880,000.
How to Choose a Portfolio Lender
If you decide that a portfolio loan product is best for you and your needs, you will want to make sure you do your research on different lenders. Great portfolio loan tips will instruct you to ask these lenders about their other interest rates, terms and conditions, and loan origination fees.
Make sure to compare loan eligibility requirements and consider various loan providers’ customer service ratings. You can find the best portfolio lenders online.
Again, make sure to review their customer service ratings and ask them any questions you may have. If a lender is not upfront with you about any concerns you have, you may want to look into a different lender.
How to Get a Portfolio Loan
Unlike conventional and FHA loans, portfolio loans are not as common to come across. This is because if a financial provider does not sell off the mortgage, they risk that their borrower may default on the loan.
Because these loans tend to be much larger than other traditional loans, most lenders do not want to risk having borrowers default on such a large sum of money. Portfolio loans are usually kept on the hush and used as a perk for a financial institution’s best customers.
If you have a long-lasting relationship with a local credit union or bank, you may be a great candidate to receive a portfolio loan. Make sure to reach out to any institution you have a long relationship with to see if they offer portfolio loans. Other great alternative companies offer competitive rates and terms if they do not.
Remember that the terms and conditions for these portfolio loans depend on the financial institution and its own requirements. Make sure to shop around for the best rates and compare these rates before you sign any contracts.
Receive Your Approval Today
Portfolio loans do not have to adhere to stringent eligibility requirements making them fantastic financial tools for real estate investment projects. These loans also provide more attractive terms and conditions than any traditional loan product.
Although these loans may come with higher interest rates, you can receive your funding much faster than conventional loans, so you can work on funding your real estate project sooner.
Contact us now if you find yourself searching for a portfolio loan near me and are ready to apply to see what you qualify for. Our team is prepared to assist you with any questions or concerns you have about the portfolio loan process.