Securing a mortgage loan is one of the biggest hurdles a real estate investor or homebuyer faces when it comes to purchasing real estate. Despite a wide variety of different loan programs available today, most conventional lenders have strict underwriting guidelines or only offer short-term loan programs with high interest rates and fees with a hard money lender, leading some to look to a portfolio lender to obtain a mortgage.
Portfolio loans, like any other financing program, come with their own set of pros and cons but can be a useful way to finance and fund an investment property. If you're looking for financing alternatives, continue reading to learn what a portfolio lender is, who a portfolio mortgage is right for, and where to find a portfolio lender.
What is a portfolio loan?
Most loan programs in existence today, including a conventional mortgage, FHA loan, or other government-insured loan program, are originated with the intent to sell the mortgage on the secondary mortgage market. This means the bank or originating lender needs to create the loan according to the underwriting standards in the secondary marketplace in order for it to be marketable. This leaves self-employed borrowers or borrowers who don't meet one or more of the underwriting criteria unable to get financing outside of a hard money loan or private loan.
Unlike a traditional lender, a portfolio lender doesn't sell the loans they originate. Instead, they hold the loan for the entire loan term, managing the loan portfolio. This allows portfolio lenders to have more control over who they lend to and the terms under which they lend on.
The good and bad of portfolio loans
Portfolio loans are usually a good fit for those who won't qualify for a conventional loan because of their credit score, work history, or other extenuating factors. Portfolio lenders have more flexibility in their terms and don't follow stringent borrower qualifications, which means there's a good chance you can qualify for a loan even if you were denied one at other lending institutions.
However, that comes with a trade-off: higher rates and fees. Because portfolio lending holds the mortgage for the entire loan term rather than selling the loan on the secondary market, the lender needs to earn a return through the mortgage interest rate and fees it charges. This means borrowers can expect to pay higher origination fees and interest rates than if going through a retail lender.
If you have a low credit score, are seeking additional loans for a new investment or rental property, are self-employed, or have high debt-to-income ratios and are willing to pay a bit more for a long-term loan, a portfolio loan may be a good option for you.
Where to find a portfolio lender
Portfolio loans inherently have more risk for the lending institution than other types of loans, and the lender knows to adjust the interest rate or fees they charge to reflect the amount of risk they would be carrying. If you're looking for a portfolio loan, start at your own bank or credit union. Having an established relationship and history with the lending institution will increase your chances of being approved for portfolio financing.
If your bank doesn't offer portfolio loans, try visiting the local credit union or searching online for the nearest lender. Compare rates, fees, and terms with other portfolio lenders, or if preferred, secure the services of a mortgage broker to help compare the rates and terms for you.
The Millionacres bottom line
The flexibility of a portfolio loan can be a big win for investors or homebuyers who are struggling to obtain financing elsewhere, but borrowers should fully understand the financial commitment they're making when seeking financing through this type of loan. For the right investment, the higher interest rates and fees can pay off in the long run.