Portfolio loans get their name because the lenders who originate these loans will hold them in their portfolio versus selling it to the secondary markets. Typically national banks do not make portfolio loans, so you must find a savings and loan institution, regional/local bank, or credit union to obtain this type of loan. As a result, in most cases, you will have a closer relationship with your lender since you will work with them for the entire life of the loan.
These lenders hold loans to earn a consistent amount of interest income. The loans they make often don't meet FHA or conventional loan guidelines, which are required to sell them to government entities such as Fannie Mae. The advantage of portfolio loans is generally for borrowers who are either seeking to invest in properties or do not qualify for a conventional loan otherwise. Let's discuss the advantages of a portfolio loan based on the type of borrower who is seeking one.
Advantages of a Portfolio loan to Investors
Investors who are looking to purchase property to earn rental income can benefit from obtaining a portfolio loan. FHA and conventional loans have property guidelines that must be met to qualify for the loan product. Homes that need significant repairs such as badly-damaged flooring, water damage, or cracks in the foundation are generally not eligible.
A portfolio loan lender will determine the criteria for what types of properties they will accept. This allows for more flexibility to make financing a renovation home possible for an investor. An investor who wants to replace their existing investment property mortgage with a new loan can use a portfolio loan called a cash-out refinance to obtain funding to finance other investment properties or make renovations.
Investors that want to finance more than two properties can seek a portfolio loan (specifically a cross collateral portfolio loan) to finance them under a single mortgage. Additionally, whereas a conventional loan is generally capped at ten properties, a portfolio loan can be used to obtain financing for more than ten.
Advantage of Portfolio loans to other types of Borrowers
Some borrowers may not qualify for a conventional mortgage loan and can look to a portfolio loan as a viable option. The credit qualifications and documented income requirements rule out borrowers who may have had problems in the past with credit or otherwise aren't eligible due to the restrictions.
For example, a self-employed borrower may meet the credit score requirements, but because they don't receive W-2s from an employer, they can't get a conventional loan. Other borrowers, including foreign nationals, those with low credit/high income, high net worth with no documented income, or those seeking a high LTV Cashout mortgage up to 95% LTV, would be good candidates for a portfolio loan.
If you have had financial issues in the past, such as a tax lien, bankruptcy, or foreclosure, you also may not have the option of a conventional loan. Portfolio loan lenders will look beyond your past problems to understand how your situation came to be and how you've worked on improving it since. This flexibility in the credit requirements can offer a borrower a viable option to finance their next home purchase.
What you should know about Portfolio loans
The advantages of a portfolio loan don't come without some trade-offs. Lenders will set their standards to qualify for a portfolio loan, and that also means that they can set their rates and fees. That means that you could be charged a higher interest rate. Since the lender is not selling the loan off to the secondary market and holds the loan in their books, they offset that risk by charging higher interest rates.
You are also likely to pay additional fees, such as an origination fee on your loan. Lenders will charge these types of fees also to help offset their risk of default from originating a portfolio loan. Be prepared to pay more fees than you would with a conventional loan option.
These additional costs should be evaluated before seeking out a portfolio loan. Despite these disadvantages, if you do not qualify for a conventional loan or are an investor who needs financing options, a portfolio loan may make the most sense for you.
Is a portfolio loan right for you? Contact the experts at NASB for any questions you may have or help you get started at 855-465-0753.