If you're a real estate investor with a nontraditional financial profile or rental portfolio, you may have to turn to alternative methods of financing. One of those methods is getting a portfolio loan. Below is a guide on using a portfolio loan for an investment property. Keep reading to learn more.
What is a portfolio loan?
Put simply, a portfolio loan is a type of mortgage loan where the debt is kept in the lender's portfolio after the loan is originated rather than being sold on the secondary market. Typically, this type of loan continues to be serviced in-house until the loan is paid off in full.
Since portfolio loans are never sold, they are not subject to the same strict underwriting standards as conforming loans. As a result, they are generally considered to be a good fit for the real estate investor whose financial package is not quite solid enough to be accepted by a traditional lender or an investor whose portfolio has outgrown the bounds of traditional rental property financing.
What are the benefits of using a portfolio loan for an investment property?
Now that you know more about what a portfolio loan is and who might be a good candidate for this type of financing, it's important to take a closer look at the benefits that this type of loan offers for investors. In light of that, we have laid them out for you below.
You'll benefit from more flexible qualifying standards
As noted above, since a portfolio loan is never sold, it is not subject to the same qualifying standards as a traditional conforming loan. As a result, every portfolio lender can set their own requirements. For example, they may have a smaller income threshold or they may accept a lower minimum credit score.
In some cases, the lender may even be more concerned with the property's ability to generate rental income than with the borrower's financial standing.
Your mortgage terms may be more flexible
In addition, your mortgage terms may be able to be more flexible as well. For example, your portfolio lender may allow a smaller down payment or a longer loan term.
Alternatively, your lender could make the decision to underwrite a loan for a property that is considered riskier than is considered acceptable for a conforming loan. Investors who specialize in working with distressed properties often need to turn to alternative methods of financing, and a portfolio loan can be a viable alternative to working with a private lender or getting a hard money loan.
You may be able to finance your entire rental portfolio
Unfortunately, Fannie Mae and Freddie Mac put limits on the number of loans that one borrower can hold at the same time. Once you have more than ten properties financed, you will have to look into those alternative methods of financing.
However, a portfolio loan can give you the option to finance multiple properties in your rental portfolio with one mortgage loan. After all, a blanket mortgage, which allows you to finance more than one property at a time, can often be a type of portfolio loan.
What should you consider before choosing this type of rental property loan?
That said, getting a rental portfolio loan is not without its considerations. We've taken the time to lay them out for you as well. If you're considering using a portfolio loan as an investment loan, look these cons over first.
You'll likely be subject to higher mortgage rates
As you might imagine, portfolio loans represent a much greater risk to the lender than your standard conventional loan. With that in mind, in order to offset that risk, they often charge higher mortgage rates, especially if you're considering an adjustable-rate mortgage.
You'll likely face higher fees
While conforming loans are highly regulated, it's important to note that portfolio loans are not. In light of that, you can expect to face steeper fees, particularly origination fees and prepayment penalties.
The bottom line on using a portfolio loan as a rental loan
At the end of the day, using a portfolio loan as an investment-property loan can be a great option for the investor who is unable to qualify for traditional financing. Still, the added flexibility that comes along with these loans does come at a cost.
If you're thinking of going this route, check with your local bank or credit union to see if they offer these loans first. Often having an established relationship with the financial institution will help mitigate some of the risk in the eyes of the lender, which can help you score a better deal.