Portfolio Loan Interest Rates and Guidelines
Table of Contents
- What Is A Portfolio Loan?
- Is A Portfolio Loan a Good Idea?
- Advantages Of A Portfolio Loan
- Smaller Down Payment Requirements
- Your Loan Size Is Not Limited
- Lower Credit Scores
- Great Deals If You Have Good Credit
- Irregular Payment Schedules
- Non-Traditional Mortgage Projects
- Portfolio Loan Interest Rates
- Base Rate
- Portfolio Loan Closing Costs
- The Benefits of High-Cost Loans
- Have Questions About Portfolio Loan Or Other Mortgage Issues?
What Is A Portfolio Loan?
A portfolio loan is a home loan that falls outside of the underwriting guidelines of more traditional types of home loans.
Traditional underwriting guidelines include Fannie Mae, Freddie Mac, FHA, USDA, and VA. Traditional loan approvals are often required to be submitted and approved through an automated underwriting system.
Unlike most mortgage loans, that are resold on the secondary market, portfolio loans are usually held by the company that initially made the loan.
Because these loans are not sold on the secondary market, they don’t have to meet traditional loan guidelines – the lender makes their own decisions as to whether to approve a loan, which sometimes works out better for the borrower.
Traditional loan programs have easily accessible and widely available qualifying guidelines that tend to be fairly consistent between programs.
There are always small differences, but for the most part, traditional financing options follow the same basic rules because traditional home loans can be bundled together and sold on the secondary market as mortgage-backed securities.
There are always small differences, but for the most part, traditional financing options follow the same basic rules.
Another common trait of a portfolio loan is that it is sold through, or to a private investor.
The word portfolio indicates that the loan is held in the portfolio of a private investor, in their investment portfolio. Because a portfolio loan is being serviced by a private investor, these loans are reviewed and approved by an underwriter, not an automated software system.
Unlike hard money loans, a portfolio loan usually requires some form of proof of the ability to repay. Expect that the lender will review your income, credit scores, employment history and continuation, and sometimes, reserves.
Is A Portfolio Loan a Good Idea?
“Portfolio” is a very high-level term that describes a specialized lending solution to a specific set of circumstances that might prevent you from using a traditional loan. Common reasons for using a portfolio loan include:
- Self-employed income using bank statements for income
- No income, high net worth/asset depletion loan
- Recent financial hardship – foreclosure / short sale / deed in lieu
- Recent bankruptcy, or still in Chapter 13
- Buying investment property – too many financed properties
- High debt to income ratios
- Bridging waiting periods – income seasoning / pending income source
Many people use portfolio loans when they are purchasing multiple investment properties and their situation falls outside of the normal conditions of a mortgage loan. Portfolio loans can also be used when you want to get a single loan for multiple properties without having to apply and get approved for multiple mortgages.
There are many situations where the interest rate is secondary to acquiring the asset. In almost all cases, I would recommend that you have an exit strategy before considering a portfolio loan.
If your lender is pushing a portfolio loan option without discussing how you’re going to get out of it, I would call that a red flag, and I would potentially reconsider the decision to buy right now.
Always have a plan for refinancing out of this loan, or selling the property.
Advantages Of A Portfolio Loan
Because your lender is not planning to resell your loan, they are not obligated to adhere to the guidelines usually required by the secondary loan market. Thus, there are a number of advantages of using portfolio loans as opposed to traditional mortgage loan options, including (depending on the deal you can establish with a lender):
Smaller Down Payment Requirements
Your Loan Size Is Not Limited
Because you don’t have to meet the secondary market’s maximum loan guidelines, the loan can be as big as the lender is willing to lend. This allows you to initiate bigger projects, get blanket loans that pay for multiple different properties, or possibly to roll up previous projects into a single big portfolio loan refinance.
Lower Credit Scores
You may be able to get a lender to give you a portfolio loan even if you have a lower credit score than traditional loans would require. You will probably have pay higher interest rates as a result, but this may give you opportunities you couldn’t otherwise secure.
Great Deals If You Have Good Credit
Lenders have to regularly report the financial credit status of the borrowers for which they hold their loans. So, if you’ve got great credit, a lender may be willing to give you an even better deal which has the added advantage to them of making their books look better.
Irregular Payment Schedules
Non-Traditional Mortgage Projects
Since the traditional mortgage process assumes a single or possibly multi-family home, a portfolio loan is oftentimes required for projects like:
- Multi-dwelling condos or co-ops
- Hotels or motels
- Commercial or mixed-allocation usage (above Fannie Mae’s 35% commercial use limitation)
- Deals where the ownership is split across multiple parties
- Projects that are not entirely made up of real-estate assets
Portfolio Loan Interest Rates
Portfolio loan interest rates can vary widely and are almost always higher than if you could use a traditional conventional, or government-insured loan.
Because these loans are serviced by private lenders, the incentive to lend money under conditions that are riskier than a traditional loan comes in the way of interest rates and closing costs.
Interest rates for a portfolio loan will most commonly range from 5% to 9%. If you see rates much higher than that, you might be looking at a hard money program that requires little to no documentation or verification.
Your base rate is your starting rate. A portfolio loan does not necessarily mean that you have to take a double-digit interest rate. Depending on your specific situation, interest rates will typically range from .50% to 5% above market rates.
Your credit score and loan to value will heavily influence the rate that you end up with.
Unlike traditional loans, where credit score, property type, loan amount and loan to value can affect the cost of the interest rate, with a portfolio loan, these factors will typically result in an adjustment to the actual rate.
Portfolio Loan Closing Costs
When using a traditional loan, in almost all cases there is an opportunity for you to “roll in” closing costs into your interest rate, and the loan officer or lender you work with is going to be paid by the lender.
It’s been quite a few years now that you have been able to get a traditional loan without having to pay an “origination fee” or “points”.
You will have to pay origination fees or points when using a portfolio loan. There’s no way to get around it, it’s just the way they are.
The Benefits of High-Cost Loans
This is where the “glass half full” talk comes in. Anytime I speak to someone about a non-traditional loan option, it always comes down to one thing….the math.
As I mentioned before, I would not consider a portfolio loan without having your exit strategy in place. Most portfolio loans are short-term hybrid ARM (adjustable-rate mortgage) loans.
A hybrid loan is fixed for the first 5 to 7 years, then turns adjustable. So always think in terms of your portfolio loan being a short-term solution that can be solved with time.
That said, the cost of a portfolio loan is an investment that will result in a profitable return in the future. Whether that return is the security of owning a home, earning equity, or converting wasteful rent into tax-deductible mortgage interest, you have to have an end game.
That said, talk to your CPA or account about the tax benefits associated with homeownership. Since mortgage interest is tax-deductible in most situations, it stands to reason that a higher interest rate translates into a higher tax deduction, right?
Those point that you are paying, those higher closing costs, may also contribute to your tax savings at the end of the year.
Non-traditional loan options require a non-traditional perspective of what this investment will accomplish for you in both the short, and long run.
A portfolio is not an emotional decision, it’s a business decision that should be carefully considered. Once you’ve done your homework, and considered all of your options, you are now in a position to make an educated and informed decision.
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