One of the essential decisions commercial real estate investors need to make every time a new investing opportunity appears is to decide the type of financing to go ahead with.
Different types of investing opportunities call for different types of loan options and knowing all your options out, and there is very important to make an informed decision.
While most beginner investors are acquainted with the basic types of mortgages, few are unaware of the diverse available loan options.
Losing out on a specific type of financing solely because you were not aware of it is the wrong place to be in, and that’s why we decided to put together a blog on portfolio loan basics.
This blog will walk you through portfolio loans’ meaning and see if it’s a good fit for you when buying real estate.
What are Portfolio Loans?
A portfolio loan is a Mortgage Loan originated by the bank and held in its portfolio throughout the loan. Unlike traditional loans, which are sold out to other third party big lending houses like Fannie Mae or Freddie Mac – the portfolio loans are held with the bank throughout the loan.
Thus, these loans do not have the stringent loan requirements that conventional loans need to meet, and banks cannot sell them in the secondary market.
This makes it much easier for borrowers to get approved and go ahead with the financing without wasting too much time fulfilling the stringent loan requirements.
How are Portfolio Loans Differ from Conventional Loans?
Traditionally, banks underwrite loans according to the previously set loan requirement standards outlined by the government. Hence, banks require loan borrowers to meet some minimum loan requirements like a suitable credit score, a favorable debt-to-income ratio, and a set down payment amount.
Banks follow these criteria to later sell these loans in the secondary mortgage market – generally to government-affiliated entities like Freddie Mac or Fannie Mae. Thus, banks generally try to recapitalize their money to create more loans.
Portfolio loans are different from these conventional loans, where these loans are not sold out in the secondary market but are held with the bank as part of the portfolio throughout the loan period.
Since banks have portfolio loans on their balance sheet for the loan period, they are called portfolio loans as they become a part of a bank’s portfolio.
Who are portfolio loans for?
Portfolio loans are most suitable for borrowers struggling to qualify the strict lending requirements to get a conventional Mortgage Loan. In recent years the lending qualification process for traditional loans has become more stringent, and thus, most of the borrowers are unable to buy the real estate they want to invest in.
For such borrowers who cannot qualify for these traditional or conventional loan programs – portfolio loans can be a perfect option.
Portfolio loans are also best suited for self-employed borrowers who do not have a stable income source or have fluctuating cash flows. Thus, for any reason, if you are unable to qualify for the conventional mortgage type – you can check out the various portfolio loans that are available.
In a nutshell – here are some pointers that could be used to understand if a portfolio loan is right for you:
- If you are self-employed and do not have a stable cash flow.
- When you have a low debt to income ratio.
- When you have a high net worth but that does not show in your credit score.
- When you have a tarnished credit history like a previous foreclosure or bankruptcy or other similar issues.
- When you want to buy a property that won’t qualify for a conventional loan program because of its poor condition.
- When you need a loan for a large amount for a one-unit property outside the scope of traditional loan parameters.
If you tick any of the boxes above, then a Portfolio loan might be right for you. Read on the significant advantages of a portfolio loan and the corresponding downsides of getting a portfolio loan before deciding to buy a Portfolio loan.
Advantages of A Portfolio Loan
Although portfolio loans are not the right type of loan for every borrower, there are some advantages of obtaining a Portfolio loan that cannot be undermined.
One of the main advantages of portfolio loans is that the loan qualification requirements for obtaining a Portfolio loan are much easier to fulfill. Since the lenders set their own rules, they do not have to correspond to the government-backed agencies’ conforming loan standards.
This allows borrowers to receive home financing where they would typically not be eligible for a conventional mortgage. Typically with the portfolio loan, you will be working with the same lending bankers throughout your loan.
So you are more likely to foster a much closer or more in-depth relationship with your lender. This lasting and more profound relationship with your lender is significant for success in real estate investing as real estate is more about striking the iron when it’s hot.
As soon as any good investment opportunity comes up – it’s always good to have a trustworthy lender who will cover your back and who will finance your loan as soon as possible.
Additionally, if you run into any issues, you can count on these lenders. Besides, for you as a borrower, portfolio loans are a safe option as they do not require the borrower to buy private mortgage insurance, which can save you a lot of money.
Since portfolio loans stay with the same lending bank for the loan’s entire life period, the borrower does not have to deal with the loan being transferred to a new servicer.
This means that you can get better customer service for your loan and don’t have to worry about fluctuating lenders.
The Corresponding Downsides of Portfolio Loan
The main reason why portfolio loans are a less popular option for real estate borrowers is that the repayment schedule for portfolio loans is less convenient than conventional loans.
Besides, the origination fees for portfolio loans are much higher than other traditional loan programs. For this reason, loan experts suggest borrowers pursue the conventional loan programs first if they qualify for them. However, when you do not qualify for traditional loan programs, it is best to take up a Portfolio loan.
Every potential home buyer has varied circumstances and specific financing needs. To understand if a particular financing option is the best option for you or not – it is best to take a consultation with a loan expert.
Get in touch with us if you want to explore the various loan options available for you and let our expert team help you determine if a portfolio loan is the best solution for you or not.