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Real estate portfolio loans are an alternative financing option for real estate investors and homeowners. As an experienced real estate investor myself, I want to provide an in-depth explanation of what real estate portfolio loans are how they work, and who can benefit from them.
What Are Real Estate Portfolio Loans?
A real estate portfolio loan is a type of mortgage loan that is retained in the lending institution’s own investment portfolio instead of being sold to government agencies like Fannie Mae or Freddie Mac.
Because the lender is keeping the loan in-house they have more flexibility around underwriting guidelines and can offer more customized loan terms to meet a borrower’s needs. Portfolio loans are considered “non-conforming” because they don’t have to adhere to the same standards as conforming loans backed by Fannie Mae or Freddie Mac.
Common features of real estate portfolio loans include
- Higher loan amounts
- Lower credit score requirements
- Higher debt-to-income (DTI) ratios
- Alternative income verification
- Unique properties like mixed-use or multi-family
Portfolio loans allow the lender to work directly with the borrower to create a loan that accommodates their financial situation, even if they don’t fit neatly into a conforming loan box.
How Do Real Estate Portfolio Loans Work?
The loan process for a real estate portfolio loan is similar to any other mortgage. Here are the basic steps:
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Application – You’ll provide information on income, assets, credit history, property details, loan amount, etc.
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Underwriting – The lender will assess your creditworthiness and the property’s value. With a portfolio loan, underwriting standards are more flexible.
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Approval – If approved, you’ll get a loan estimate outlining the interest rate, fees, and loan terms. Rates are typically 0.5-1% higher than conforming loans.
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Closing – Standard closing process with title search, appraisal, disclosures, signing documents, etc.
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Servicing – The lender services the loan directly over its full term. There’s no chance of the loan being sold to another institution.
A key advantage of portfolio lending is that everything happens in-house. You work with the same lender from application to payoff. This allows for a more customized, personalized lending experience.
Who Are Real Estate Portfolio Loans Best For?
Portfolio loans are a good fit for borrowers who don’t quite meet conventional lending standards, such as:
- Self-employed individuals or business owners with variable income
- Low credit scores or high debt-to-income ratios
- Limited credit history or non-traditional credit profiles
- Investors or flippers requiring speed and flexibility
- Purchasers of unique properties like mixed-use buildings
Portfolio loans provide an alternative path to homeownership or allow real estate investors to scale their business. The flexibility and customization of portfolio lending makes it ideal for those who fall outside the conforming loan credit box.
As an investor myself, I’ve used portfolio loans to purchase multifamily properties when I didn’t meet the strict requirements for agency loans. The ability to work directly with a lender to create a loan that fit my needs was invaluable in building my rental property portfolio.
Pros and Cons of Real Estate Portfolio Loans
There are some clear advantages but also potential drawbacks of portfolio lending to keep in mind:
Pros
- More flexible qualifying guidelines
- Ability to customize loan terms
- Direct relationship with lender
- Speedier closings
- Alternative income verification
Cons
- Higher interest rates and fees
- Higher down payment requirements
- Limited availability
- Less predictable loan process
- Prepayment penalties
While portfolio loans provide needed flexibility, it comes at a cost. You’ll want to shop around and compare options to find the best lender for your situation.
How to Get a Real Estate Portfolio Loan
Here are some tips for obtaining a portfolio loan:
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Check with local banks and credit unions to see if they offer portfolio lending. Smaller community institutions are more likely to portfolio a loan than large national banks.
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Work with an experienced mortgage broker. They can match you with a lender specializing in portfolio loans. Make sure the broker is knowledgeable about these non-conforming loans.
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Ask your real estate agent for recommendations. Agents often have relationships with lenders and can suggest ones open to portfolio lending.
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Seek out online portfolio lenders. There are specialized online lenders providing portfolio loans across the country. Do your due diligence to pick a reputable one.
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Be prepared to provide ample documentation. Portfolio lenders will still want to see evidence you can handle the loan, even with flexible guidelines. Have your financial records in order.
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Make sure the lender is properly licensed. Verify they are authorized to conduct lending in your state. Check credentials to avoid predatory lending practices.
With the right lender, a real estate portfolio loan can be an extremely helpful tool for your investing strategy or home purchase. Just make sure you understand the pros and cons and take the time to find the best loan option for your needs. Reach out if you need any help navigating portfolio lending!
How portfolio loans work
A portfolio loan has plenty in common with non-portfolio mortgages. You’re still going to apply to borrow a chunk of money, and a lender will assign you a risk level based on the likelihood that you’ll pay it back. That risk level helps determine the loan interest rate and other terms. If you agree to these terms and take out the mortgage, you’ll receive a lump sum that you agree to repay in monthly installments over a set time.
While the application process is largely the same, portfolio loans can offer faster access to financing, more flexible repayment terms and potentially higher loan amounts than other mortgage types.
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Why Portfolio Loans Are One Of The BEST Methods Of Financing For Rental Properties
FAQ
What is a portfolio loan in real estate?
Are portfolio loans hard to get?
How much money down do you need for a portfolio loan?
What is the difference between a home equity loan and a portfolio loan?
What is a portfolio loan?
Portfolio loans are a type of mortgage that lenders originate and retain instead of selling on the secondary mortgage market. Portfolio loans offer more flexible underwriting standards and faster funding times than conventional loans, but often come with higher interest rates, closing costs and down payments.
What is a portfolio mortgage?
Unlike traditional mortgages sold to investors on the secondary mortgage market, portfolio lenders originate and keep portfolio loans in-house. Because the loans are held and serviced by the lenders, it gives them more flexibility when setting mortgage terms – often in the borrower’s favor.
What makes a good portfolio lender?
The best portfolio lenders can offer financing for real estate with low rates and flexible qualification requirements. They should also have multiple loan programs, such as bridge loans, construction financing, and rehab loans.
Is a portfolio loan a good option?
Portfolio lenders may set higher interest rates and higher minimum down payments, and can charge additional fees that are not common with conventional lenders. As with any type of mortgage, a portfolio loan comes with benefits as well as drawbacks. For certain types of borrowers, a portfolio loan might be the best, or only, option.