A portfolio loan is a type of mortgage that a lender issues to a borrower but keeps within their range of investment holdings instead of selling on to another company. Due to the fact that the portfolio lender originates and retains a portfolio loan rather than reselling it on the secondary market, the lender is able to set more flexible terms for the mortgage, which are frequently to the borrower’s advantage.
There are three main types of portfolio mortgages you can choose depending on your goals:
- Blanket Mortgages – With this loan type, you can borrow anywhere from $100,000 to $50 million, choose the term from two to 30 years and use this money to purchase multiple parcels of land.
This type of loan is especially attractive for borrowers looking to build a subdivision of homes. The land can be financed in a blanket mortgage, and then parcels are released and sold as the houses are built. It keeps the builder from having to apply for a new mortgage for each separate property.
- Jumbo portfolio loan – If you were to choose this loan type, you could borrow usually about $500,000 and choose a term from 15 to 30 years.
A jumbo portfolio loan is any mortgage loan that is too large to be sold on the secondary market. The Federal Housing Finance Agency sets these jumbo loan limits annually and any mortgage above this limit is ineligible to be sold to Fannie Mae or Freddie Mac. The limit is set on a county-by-county basis.
- Cash-out refinance portfolio loan – This loan does not have a minimum size and can be taken out for a term of 15 to 30 years.
Here, the borrower reworks an existing mortgage to obtain the equity locked in the property. This can happen when a loan has been paid down over time, when significant improvements have been made to the property, or when a recent appraisal has revealed a large valuation increase.
The money received this way isn’t taxed and can be used for the rehabilitation of a property, the purchase of another property, or even debt consolidation.
What Exactly Is a Portfolio Loan?
Yes, we got you familiar with different types, but what is exactly a portfolio loan and how does it work?
A portfolio loan is a mortgage loan for commercial or investment properties. A borrower can use this type of loan to purchase or refinance real estate that is held as an investment, such as vacant land or apartment buildings.
This type of financing is typically used by borrowers who don’t qualify for traditional bank loans because their income maybe does not meet the requirements set forth by lenders. Portfolio loans are generally at a higher cost and are also known as business purpose or investor loans.
How Do Portfolio Loans Work?
To put it as simply as possible, a portfolio loan is a second mortgage. The other main difference between a portfolio loan and an owner-occupied mortgage is that with a portfolio loan you can borrow up to 80% of the value of your property, compared with 70% for owner-occupier mortgages.
The majority of portfolio loan lenders will offer what’s called an interest-only repayment arrangement for 5-10 years at which point they will begin charging principal & interest repayments instead.
A portfolio mortgage loan doesn’t need to have a fixed repayment date so lenders have more flexibility when deciding how much they need to charge borrowers in order to minimize their risks. Because they are offering a larger sum of money, they are also going to have longer repayment terms. Borrowing large sums of money is also quite risky either way, so lenders have many tactics in order to lower the default rate.
Portfolio Loans: Pros and Cons
A portfolio loan has many pros and cons associated with it that should be considered when making the decision. As a result of the long repayment term, you should always first be sure you can afford it before making any commitments.
Let’s take a look at both sides of a real estate portfolio loan so you can make an informed decision down the road. Don’t hesitate to hire a mortgage advisor if you need any additional help.
- Good idea if you have enough equity in your home.
- Portfolio loans are a good idea if you want to use the loan for renovations or other large expenses.
- A good way to get needed funding fast.
- Offer flexibility. With these loans, you can easily borrow more money, put less down and potentially avoid mortgage insurance.
- A good option for self-employed borrowers. More traditional mortgage lenders will want to see steady employment and a good income level, so a fluctuating income of small businesses might be ineligible to qualify. Portfolio loan requirements can be much more flexible and lenders are more willing to work with these individuals.
While portfolio loans can be a great way to get access to capital and grow your investing business, they are not for everyone.
- They have high-interest rates. The interest rate charged on these loans tends to be much higher than what banks would charge on personal lines of credit or unsecured business lines of credit (BLOC).
- There may be some costly fees. Since the lender is offering greater flexibility to borrowers who might not be able to qualify elsewhere, they can charge higher additional fees on a portfolio loan.
- There may be a prepayment penalty that you need to pay if you make balloon installments.
How to Qualify for Portfolio Loans
Now that we covered the basics, your next question probably is – How to qualify for a portfolio loan?
Well, in order to be eligible for this loan, you must:
- Be a property owner. If you just took out a mortgage and have almost no equity in the property you may not be eligible to qualify.
- Have at least one year of occupancy in the property.
- Have a low debt-to-income ratio.
As we already mentioned, these loans can be fairly flexible, so the requirement we gave you should only be used for informational purposes as they can vary a lot based on the lender you choose. Be sure to do additional research and check with multiple lenders about what they need you to fulfill before applying for a portfolio loan.
Who Offers Portfolio Loans?
A portfolio lender is a lender that offers mortgages to consumers but does not sell those mortgages to Fannie Mae, Freddie Mac, or other agencies. When a loan is held in a portfolio it means the lender can establish its own approval standards instead of conforming to the requirements for selling loans on the secondary market.
There are many lenders offering portfolio loans:
- Banks, mortgage companies, and private lenders.
- Community banks, credit unions, and brokers.
- Direct mortgage lenders are not big enough to be part of the top banks.
Be sure to choose a lender that has the best portfolio loan rates and terms that fit your financial circumstances and goals.
Are Portfolio Loans a Good Idea?
Most people already know that real estate investments can be a great way to make money.
However, it can take some time for your investment to start paying off. When you’re ready to sell your property and cash out, it’s important that you understand the whole process behind it before making any decisions.
Depending on your plans, portfolio loans can either be a good fit for you or not so much. In case you are planning on selling a property within a few years and want quick cash now, these loans might not be right for you. Instead of getting a portfolio loan in such circumstances, consider short-term options like hard money loans or private investors.
These loans are also not the best idea if your goal is simply to leverage against another piece of property. If this is the case in your situation, then stick with those traditional options instead of using a portfolio loan.
Portfolio loans are mortgage loans that a lender keeps in its lending portfolio. Most of these loans cannot be sold on the secondary market, meaning the lender has no choice but to keep the loan.
These loans may be a helpful tool for real estate financing if you take your time and learn ins and outs of the whole process. They may also prove more attractive than traditional loan products to borrowers in certain situations.
Taking out such a big loan as this one should be done with caution, so if you need any help in the whole process don’t hesitate to hire a professional to get adequate help.