A portfolio loan is a loan that is not sold to another lender but is kept on a banks own portfolio. With a typical mortgage after you have made your first few payments the bank will sell your loan off to a different secondary lender. If you have had a mortgage in the past you probably remember getting a letter that you need to start sending your payments to a different lender with a new address. That is the difference between a regular mortgage loan and a portfolio loan.
Portfolio loans are often utilized by investors who are looking to purchase residential real estate. These investors may be a part of small banks or credit unions. They are there to assist people who have bad credit, filed bankruptcy, any foreclosures, tax liens, student loans, medical debt, or a massive amount of credit card debt. Mostly for those who have difficulty qualifying for a traditional mortgage.
Typically a portfolio loan does not get sold to other lenders. They don’t sell them because they are receiving monthly payments from the borrower. This is consistent and constant passive income. If you have purchased a home before, you will have noticed that after the lender has had your loan for a few months – they have sold it to another lender to service the loan.
As a borrower, this may be beneficial in the long run. A relationship with the lender has already been made and when they keep the loan to themselves, you get to continue on with that relationship instead of creating a brand new one.
Who Can Take Advantage of A Portfolio Loan
Portfolio loans are a very incredible option for borrowers. These are often available to those who do not qualify for a traditional loan. The lenders are able do this because these loans are not sold to the government like most residential loans, they are held by the lender to be kept on their own balance sheets. Here is a list of situations or people that may want to consider a portfolio loan:
Self employed: The self employed portion of the United States, which is pretty large, will attempt to save as much money as they can on taxes. It will only help them in the long run. When doing this, it may look like the self employed are not as wealthy on paper. Taking this to a portfolio lender will analyze cash flow statements through your bank. Most loans are based off of the amount of money that is accumulated on a yearly basis.
Poor credit score: There may be individuals who have a poor credit score, but have the funds to put a pretty decent sized downpayment on a home, or even pay the majority of the home. This may happen when a foregin national moves to the country. Building a credit score takes a lot of time. Portfolio loan is an excellent option because a lot of mortgage loans have a difficult time working with nonresidents, but portfolio loans do.
The Federal Housing Administration (FHA) has certain requirements for buying a property. They do not want to get into something that is going to require an excess amount of maintenance. This will make it difficult to get approved for a conventional or fha approved loan. If this is the case, then it would be an excellent choice to look into getting a portfolio loan.
These are some scenarios that the FHA will most likely disallow for traditional financing. It could be fixing a roof, missing fixtures, damaged floors, or cracks in the foundation. These are all possible reasons to get a portfolio loan, but it is not limited by this list. Because they are written by the lender, it can be used for potentially almost anything.
Benefits And Disadvantages of Portfolio Loans
Benefits:
The lender instead of the government is assuming all of the risk in a portfolio loan. The lender is able to write up the requirements and the terms – they can underwrite it however they want. This may be beneficial to you as you can negotiate the terms as much as possible. The lender will most likely require fewer official documents, increasing your chances of approval.
Customer service is becoming more and more king in business. The better the customer service, the better the business. Portfolio loans require and incredible relationship, which will result in better service to the customer.
Portfolio lenders are often small, privately owned community banks. Since these are privately owned, they do have the ability to alter many of the terms of the loan to fit the customer’s financial circumstances. This can change the terms of the loan, such as payments. Monthly, weekly, or bi-weekly payments could be arranged.
Disadvantages:
Consumer protection might go right out the window. Portfolio loans are not subject to the ability-to-repay rule. If something were to happen and you want it to be covered, the lender must prove that the borrower submitted document of proof that they are able to repay the loan. If that documentation is not available, then the consumer protection option is no longer valid.
Because portfolio loans is not the traditional way of funding a home, the cost could be potentially higher. They do come with higher interest rates. The average interest rate on a portfolio loans tends to be around one to two percent higher than a traditional mortgage loan. Depending on the lender and the borrower, they could be even higher.
Another reason why it may be more costly because the lender is assuming all of the risk. They are not going to sell the loan to another lender. They need a guarantee that they are going to be making a pretty penny doing this. Especially if the loan goes into default, they want to try and get as much as they can before that happens.
Prepayment fees do exist with portfolio loans. This amount of a prepayment fee is limited by federal law, but that does not mean that there is not one that will be hitting you. Prepayment fees may be negotiated, or maybe even put into the loan itself. It does not hurt to have that conversation with the lender.
Rental Portfolio Loans
Rental portfolio loans are here to help simplify the underwriting requirements and providing personal guarantee. They allow investors to combine their assets into a blanket portfolio, meaning it can help finance multiple assets together instead of separately. Investors with several properties can finance them all under one loan payment under a rental portfolio loan.
Most traditional banks will limit the amount of assets that can be provided in a single loan, or by a single borrower. They do not want to want to increase their repay risk. Rental portfolio loans do not come with this limitation. Depending on the institution or lender, there may not be a maximum number of assets, loans, or amount of money that they are willing to provide the borrower.
A large number of loans are obtained by checking the credit metrics and income of the borrower. Rental Portfolio Loans are often funded by looking at the Loan to Value ratio. And as the ratio does better, it may be possible to renegotiate the interest rate.
Consolidating a bunch of loans as a big advantage to investors. It will allow them to be able to roll them all up into a single loan, not complicating it more than it needs to be. It will only be one monthly payment and a single point of contact. When these loans are consolidated and put into a rental portfolio loan, you will be working with one specific person on your loan. This will only create an incredible relationship and great customer service.
Many lenders who provide rental portfolio loans will often offer a non-recourse loan. Which means that the loan is secured by collateral. In this scenario the collateral will most likely be the properties. They will not come back to you and require you to pay extra or additional once they already have seized the property.
How to buy multiple properties with one mortgage?
This is where a portfolio loan / Blanket Mortgage is a perfect choice. The banks that offer these loans are more lenient than the big banks and want your business! Each lender may have its limits but you will find lenders that provide loans like this on a regular basis.
Where to get a Portfolio Loan?
If you are looking to apply for a portfolio loan you will probably find that your typical big bank will not offer a loan like this. Thats OK, because you can find commercial business lenders, and some small community banks will offer this type of loan and be happy to have your business. Neal Business Funding offers Portfolio Loans at competitive rates, simple application process and fast closings.
Final Thoughts
Portfolio loans are an incredible option for those who struggle to qualify for a traditional mortgage or for real estate investors with several properties that want to consolidate them with one loan payment.
