Firstly, what is a portfolio loan?

In most cases, lenders actually sell your loan in the secondary mortgage market. This helps them to free their capital and lend to other clients. However, portfolio loans are different. A portfolio loan is a loan in which a lender holds onto the loan instead of reselling it. Simply put, it means that this type of loan remains in the lender’s portfolio.

As a result, portfolio lenders don’t have to conform to conventional terms. The loan will stay with them. This way, they can offer lower qualification requirements and many other advantages. This is especially valuable for people with difficulties applying for a more traditional loan.

How is it different from conventional loans?

As we’ve mentioned, the main difference is that the loan stays with the same lender. This allows them to be more flexible with terms and qualification criteria. For example, whether you want to apply for an apartment mortgage or consider an apartment building loan, you must fulfill high (maybe even unattainable) criteria for conventional lenders.

On the other hand, portfolio lenders have the freedom to create their own criteria. That means you may qualify for a loan even if your credit score isn’t high or your income is lower. Of course, other terms will be differently tailored, too – from interest rates to loan duration and fees.

What is a portfolio lender?

So, who do you go to when applying for a portfolio loan? Not all banks offer this option. And even when they do, they don’t advertise it much. Portfolio loans present a higher risk for lenders, so most traditional ones tend to avoid them.

A portfolio lender may be an individual, bank, or other financial institution such as an investment firm, hedge fund, etc. While they’ll take more significant risks, they’ll also work more closely with you, offering tailor-made loan solutions.

When is a portfolio loan the best choice?

Whether you plan to buy a residential or investment property, you can opt for this type of loan. However, consider all the other expenses and gains if you want to buy a house.

When buying a dream home, you need to consider moving, logistics, storage, furnishing, decorating, and many other things. Of course, it won’t be too difficult to hire expert movers or find the right storage in NYC. But there’s no high return on investment when buying a home.

Therefore, portfolio loans are a much better choice for real estate investments, such as apartment complex loans where ROI is high, and you can easily pay off the mortgage.

 How does a portfolio loan work?

In most ways, portfolio loans work similarly to all other loans. Naturally, the loan terms will vary depending on the amount and the type of loan. But from your perspective, paying a portfolio loan mortgage is the same as paying a regular mortgage. The process of getting the loan is quite similar. It consists of the following:

• applying for the loan
• underwriting
• negotiation of terms with the lender

As they’re higher risk, portfolio loans often have higher interest rates than traditional loans. Still, if your goal is to invest, and your plan is solid, it’s an excellent option, especially if your investment doesn’t conform to traditional lenders’ criteria. 

Also, you may expect the fees you typically pay for all loans (closing fee, points, etc.) to be a bit higher as well.

The advantages of portfolio loans

There are many advantages to opting for a portfolio loan. In fact, depending on your situation, it may be a better choice for many reasons. Here’s when you should apply for a portfolio loan and the benefits you can expect.

Your credit score is low

Traditional lenders focus on your income, credit score, employment history, savings, etc. However, even if you have bad credit, tarnished credit history, or a bad debt-to-income ratio, but you have a sound and lucrative investment plan, you can qualify for a portfolio loan.

Of course, lenders will still assess risk and liabilities and your ability to pay the mortgage. But if your investment is good, they’ll be willing to work with you.

You’re self-employed or own a local business

A steady income is a priority for traditional lenders. And if your income fluctuates due to self-employment and similar reasons, it doesn’t look secure enough for a conventional loan. In such a case, a portfolio loan is an excellent choice.

The investment property you want is not typical

Traditional lenders also assess your investment on strict criteria. Even if your plan is good, if the property doesn’t fit their standards, they’ll be reluctant to approve your loan. However, portfolio lenders are more flexible and open-minded.

Portfolio loans are more flexible

Apart from considering different types of income and investment, portfolio lenders are also more willing to negotiate the terms, including underwriting, downpayment, etc. If they see you have an excellent investment opportunity, they’ll be willing to meet you halfway and create a strategy that will suit you.

How to find the right portfolio lender?

So, how do you find the right portfolio lender for your loan? The best course is to talk to your real estate agent or mortgage broker. They may recommend someone they know who is trustworthy and reliable.

However, not all portfolio lenders are the same. On the contrary, the fact they create their own criteria means that your loan options may vary significantly from lender to lender. And it’s vital to explore all possibilities. Luckily, experts can help you find the best match for your needs.

The bottom line

In short, a portfolio loan is a perfect option for investors who don’t qualify for traditional loans. Unlike conventional lenders, portfolio lenders will keep your loan in their books. This enables them to think out of the box and create options on a case-to-case basis. If you have a sound investment opportunity, this type of loan is an excellent choice because lenders will give you more flexibility and consider your specific needs and circumstances.