Investing in real estate can be a great way to earn income and build wealth. However, it’s almost impossible for most people to invest in real estate without some kind of financing. Real estate is incredibly expensive, after all, and most people don’t have the money needed to purchase a property outright.
Fortunately, there are a wide variety of financing options out there that you can take advantage of. In fact, many of these financing options, such as portfolio loans, are ideal for real estate investors.
What Is A Portfolio Loan?
A portfolio loan is a type of loan that is typically used by investors or borrowers with specific needs that cannot be met by conventional loans. For example, portfolio loans can be used by borrowers who have a poor credit history or by investors who are looking to purchase multiple properties.
Additionally, most conventional loans are sold by lenders to investors on the secondary market, where they are packaged into securities. Portfolio loans, on the other hand, are held by the originating lender and not securitized. This allows portfolio lenders to have more flexibility with regard to loan terms and conditions.
As a real estate investor, there are some considerable advantages to applying for a portfolio loan to pay for your investment property. The following are a few of the significant benefits of using a portfolio loan instead of a traditional loan:
The first and perhaps most obvious advantage of portfolio loans is that they’re easier to get approved for. If your application for a conventional loan was rejected, that doesn’t mean you’ll be rejected for a portfolio loan. That’s because it’s up to the discretion of the portfolio lender whether to approve your loan or not.
Portfolio lenders are more interested in the borrower’s overall financial picture. Certain financial blemishes won’t automatically disqualify you if your overall financial health is solid.
Additionally, conventional lenders tend to be more wary than portfolio lenders about approving loans for real estate investments. Portfolio lenders often still take this risk because there’s a greater chance of profit for them than selling the loan on the secondary market.
If your credit score isn’t great but you have a track record of making sound real estate investments or you have a large sum of money saved up, a portfolio lender might be more willing to approve the loan. Portfolio loan approvals will vary not just from one lender to another, but on a case-by-case basis as well.
Because the lender originates and keeps the loan in-house instead of selling it on the secondary market, they can offer greater flexibility to the borrower. For instance, a portfolio lender might be willing to work with you if you’re self-employed or if you have a complicated financial situation.
Additionally, they will be more willing to negotiate the terms of the loan. In fact, they may even be willing to adjust the terms even after the loan has been issued. For example, if you’re struggling to make payments due to an unforeseen circumstance (and it wasn’t caused by your own negligence), a portfolio lender might be willing to work with you to modify the loan.
Portfolio loans are ideal for real estate investors because they are much more investor-friendly than conventional loans. If you’re an experienced investor, a portfolio loan can give you the flexibility and leeway that you need to close a deal.
Conventional lenders have much stricter requirements in place for real estate investment loans and will often reject loans for multiple properties. In fact, you can’t have more than ten investment properties – and the more properties you own, the more difficult it becomes to qualify for a conventional loan to invest in additional properties.
As such, if you’re an investor trying to build your real estate portfolio, you may not qualify for a conventional loan even if you have great credit, reserve funds, and regular income. There’s no such restriction on portfolio loans.
How They Work
When it comes to conventional loans, lenders will have to abide by different loan standards established by Fannie Mae and Freddie Mac. These standards typically include a maximum loan amount, a minimum credit score requirement, and income requirements.
Portfolio loans don’t have to follow these guidelines since they are not being sold to these government-sponsored entities. Instead, each portfolio lender will have their own guidelines and requirements that they’ll use to decide whether or not to approve a loan.
For instance, some portfolio lenders might only lend to borrowers with a minimum credit score of 680 while others might have a minimum credit score requirement of 620. Additionally, some portfolio lenders will only loan up to 70% of the property’s value while others might loan up to 80%.
- The Portfolio Loan Process
The first step is usually to submit a loan application. This is where you’ll provide the lender with information about your financial situation, including your income, debts, and assets. The lender will also pull your credit score to get an idea of your creditworthiness.
From there, the lender will decide whether or not you qualify for a portfolio loan. Fortunately, the approval process for portfolio loans tends to be fast. Whether or not you qualify will depend on the lender’s opinion of the risk you and your investment present. If the investment appears to be too risky, the lender may decline your loan or offer you a loan with less favorable terms.
On the other hand, if the investment appears to be a good one and you have a track record for good investments, the lender will not only be more likely to approve your loan, but they may be more flexible with the terms, which include the interest rate, repayment schedule, and other conditions.
Once you’ve agreed to the terms of the loan, the lender will begin the process of underwriting the loan. This is where they’ll verify your financial information and make sure that you’re able to repay the loan.
If everything looks good, the loan will be approved and you’ll be able to close on the property. After that, it’s just a matter of making your monthly payments on time. If you default on the loan, the lender will have 100% ownership and be able to seize the asset and sell it to recoup their losses.
How A Portfolio Loan Can Help You Buy A Home
Portfolio loans can be quite beneficial for homebuyers as well. This is because portfolio loans can offer more flexibility than traditional mortgages. For example, portfolio loans may have lower down payment requirements or higher debt-to-income ratio standards.
Additionally, portfolio loans can have shorter terms, which can help you save money on interest over the life of the loan.
If you’re looking for a portfolio loan to buy a home, it’s important to compare offers from multiple lenders. This is because each lender will have its own set of terms and conditions, which can vary widely. As such, it’s important to shop around and compare offers before committing to a loan.
Costs Of Investing in Residential Properties
Just like any other type of home loan, there are numerous costs associated with taking out a portfolio loan. It’s essential that you understand what these costs are and how they can impact your finances before you commit to the loan.
- Up-front portfolio loan costs: Although a portfolio loan will cover the majority of the property’s total cost, there are a number of up-front costs you’ll be required to pay for out-of-pocket. These costs include the following:
- Closing costs: Closing costs include fees for essentials like the appraisal, title insurance, title transfer, taxes, and more. The closing costs on a portfolio loan are usually higher than on a conventional loan.
- Origination fees: Origination fees are charged by the lender for processing the loan. These fees can vary from lender to lender, but they’re typically between 1% and 5% of the loan amount.
- Down payment: The down payment is the portion of the purchase price that you’ll need to pay for out-of-pocket. Because a portfolio lender can finance as much of the investment as they want to, portfolio loans can have lower down payment requirements than conventional loans.
- Portfolio loan requirements: The up-front requirements for a portfolio loan are much less stringent than those for a conventional loan. However, they do vary from one lender to another and are based on various factors.
Who Can Be A Borrower For This Type Of Loan?
Keep in mind that portfolio loans aren’t necessarily better than other types of loans. Because interest rates and fees can be on the higher end, conventional investment loans might suit you better. It all depends on what your situation is. With that said, the following are a few reasons why you may want to consider a portfolio loan instead of a conventional loan:
You’re Self-Employed Or A Local Business Owner
If you’re self-employed or a local business owner, it can be difficult to get approved for a conventional loan. This is because most lenders require at least two years of tax returns in order to verify your income.
With a portfolio loan, however, the lender will focus on the property itself rather than your income. As such, you may be able to get approved for a loan even if you don’t have two years of tax returns (which may be the case if you’ve only recently become self-employed or started your own business).
Additionally, if you’re a business owner or full-time real estate investor, lenders may be more willing to establish a relationship with you because they recognize that you can help them generate more long-term income as their established partner. As a result, they may be more willing to forego some of the strict requirements of a conventional loan to lend you a portfolio loan.
You’re Asking For Down Payment Flexibility
If you don’t have a lot of money on hand but have a great investment opportunity, a portfolio lender can give you the flexibility you need when it comes to the down payment requirements.
Whether or not a lender will lower the down payment requirement will depend on several different factors, including your credit score, your debt-to-income ratio, and whether you’re able to demonstrate that the real estate you want to purchase is a good investment.
This flexibility can give you the opportunity to negotiate better terms for the down payment, such as agreeing to a slightly higher interest rate.
You Have A Bad Credit Score
Even if you have little to no debt to your name and you have some reserve cash saved up, you may still have a bad credit score. This can happen as a result of unforeseen circumstances in your past, whether it’s because you lost your job at one point, had to deal with emergency medical expenses, or simply made a financial mistake.
Unfortunately, if you have a bad credit score it can be difficult to get approved for a conventional loan. This is because most lenders require a minimum credit score in order to qualify for a loan.
However, with a portfolio loan, the lender will focus on the property itself rather than your credit score. They’ll also take into consideration your present financial situation. As such, you may be able to get approved for a loan even if you don’t have a great credit score.
You Have A Tarnished Credit History
If you have a tarnished credit history, it can be difficult to get approved for a conventional loan. Even if you’ve repaired your credit score, certain past infractions can raise red flags for lenders, such as a previous bankruptcy or foreclosure. This is much less of a concern for portfolio lenders if other aspects of your application speak for your financial responsibility and investment acumen.
You Have Poor Debt-to-Income Ratio
If you have a disproportionate amount of debt compared to your income, it can be difficult to get approved for a conventional loan. This is because most lenders want to see a debt-to-income ratio of 36% or less in order to qualify for a loan. If your debt-to-income ratio is any higher than that, conventional lenders will assume that you can’t afford to take on more debt.
On the other hand, portfolio lenders aren’t influenced by debt-to-income ratios in isolation. This is because they understand that you’re making an investment that is expected to generate a profit. For instance, if you’re investing in a rental property, they’ll understand that you’ll be generating rental income that can offset a poor debt-to-income ratio.
You Can’t Qualify For A Conforming Loan
A conforming loan is a type of conventional loan that meets the guidelines set by Freddie Mac and Fannie Mae. These are two government-sponsored enterprises (GSEs) that purchase mortgages from lenders and package them into mortgage-backed securities (MBS).
For a conventional loan to be eligible for purchase by Freddie Mac or Fannie Mae, it must meet certain criteria.
The main criteria is the loan amount. Conforming loans can’t exceed a certain amount, which varies by location. As such, if you’re looking to invest in commercial properties, the amount you need will likely exceed the loan amount restriction.
Additionally, there are certain types of properties that don’t qualify for conforming loans, such as investment properties, vacation homes, and properties in need of major repairs or renovations. If you’re looking to purchase one of these types of properties, you may have a difficult time getting approved for a conforming loan.
Fortunately, portfolio loans don’t have these set restrictions.
Why A Portfolio Loan Isn’t For Everyone
Considering the advantages of getting a portfolio loan, it might seem like a no-brainer. However, there are a few drawbacks that you should take into account when deciding whether a portfolio loan is the best option for you. With that in mind following are a few reasons why portfolio loans aren’t for everyone:
Higher Interest Rate And Fees Attached
Generally speaking, portfolio lenders tend to charge higher interest rates and fees than traditional lenders. This is because they are taking on more risk by lending to borrowers who may not qualify for a conventional loan. As such, you’ll need to weigh the potential benefits of a portfolio loan against the higher costs.
Many portfolio loans come with prepayment penalties, which means you’ll be charged a fee if you pay off the loan early. The reason portfolio lenders charge prepayment penalties is to recoup the costs they incur when originating the loan.
Not to mention that they were banking on generating a profit on the loan’s interest. If you pay the loan off early, they lose money because you’re not paying all the interest that was expected from a longer loan term. As such, if you’re a fix-and-flip investor that plans on paying back your loan quickly, a portfolio loan might not be for you.
Unfavorable Repayment Schedule
Another drawback of a portfolio loan is that they often come with an unfavorable repayment schedule. This means that you may be required to make interest-only payments for a period of time, followed by a large balloon payment at the end of the loan term.
This can make it difficult to budget for your loan payments, and it can also put you at risk of defaulting if you’re unable to make the balloon payment.
What Is A Portfolio Lender?
A portfolio lender is a bank or other financial institution that makes loans and keeps them on its own balance sheet rather than selling them in the secondary market. Keeping these loans in their own portfolio gives them a chance to make a higher return on investment (ROI) than if they had sold the loan in the secondary market.
Because portfolio lenders hold on to their loans, they have more flexibility when it comes to underwriting the loan and can often offer more favorable loan terms than banks that sell their loans.
The main advantage of working with a portfolio lender is that they are typically more willing to work with borrowers who may not qualify for a conventional loan.
This is because they’re able to tailor the loan to the borrower’s needs and are not bound by the same strict underwriting guidelines as traditional lenders.
Portfolio lenders are typically more responsive to customer needs and can make decisions quickly since they are not beholden to shareholders and are not required to get approval from a higher authority to make a loan.
How To Find A Lender
If you’re interested in getting a portfolio loan, the first step is to find a lender. You can start by asking your real estate agent or mortgage broker if they have any recommendations. You can also check with local banks and credit unions to see if they offer portfolio loans.
It’s worth noting that most lenders do not advertise that they offer portfolio loans. They do not offer portfolio loans to just anybody (after all, they’re taking on a greater risk by holding the loans in their own portfolio). As such, they often reserve portfolio loans as a perk for their best customers.
If you’ve built a relationship with a lender, bank, or financial institution, then you can ask them if they offer portfolio loans. As a result of having an existing (or previous) relationship, they’ll be more open to helping you secure a portfolio loan.
Discover Which Loan Option Is Right For You
Portfolio loans can be a great option for borrowers who may not qualify for a conventional loan. They offer more flexible underwriting and can often provide more favorable loan terms. If you’re planning to invest in real estate, a portfolio loan might be just what you need.
It’s also worth noting that building a relationship with a lender can help you secure future portfolio loans with even better terms.
However, as is always the case, it’s important that you explore your financing options and weigh up the pros and cons of the different real estate loan types that are available to you.