The Power of Portfolio Loans Is Flexibility
When your home loan doesn’t fall within the typical framework offered by many lenders, the flexibility you need can be hard to find in a mortgage market driven by conformity. If you fail to meet strictly defined guidelines, there is often no accommodation available. Even a slight deviation from the norm can be enough to hold back an approval. Although the experience can be extremely frustrating, you shouldn’t give up. A solution may be within your reach. The flexibility you seek can often be found in a portfolio loan.
What Is a Portfolio Loan?
A portfolio loan is a non-conforming loan that is not sold on the secondary market. Instead, it is kept and serviced by the lender who makes the loan. It becomes part of the lender’s investment portfolio. When a lender decides to keep a loan, they take on all risks associated with the loan, which may include borrower default, interest rate increases, and decreasing property values. In turn, because the lender takes on the risk, they have the power to set their own guidelines and loan terms. A portfolio loan allows the lender flexibility to accept loans that a traditional loan program could not accommodate.
The power of a portfolio loan truly lies in its flexibility. Because the lender plans to keep the loan, they have the luxury of determining what is acceptable to them. The lender will often focus on the borrower’s entire financial situation to determine whether their strengths outweigh any challenges. They have the discretion to overlook minor issues when the borrower’s overall finances are solid or can be mitigated by other factors or requirements. This flexibility allows them to tailor the loan terms to fit the unique circumstances of each borrower. In addition to expanded guidelines, portfolio lenders also have the freedom to offer specialized features that may not be available with a traditional loan.
A portfolio loan provides the flexibility to overlook minor issues or mitigate them with additional requirements.
When Does a Portfolio Loan Make Sense?
There are a number of situations in which a portfolio loan may be the solution when a borrower doesn’t fit into a tradition loan scenario. Because of the complexity of these types of loans, it’s helpful to work with an experienced lender who is an expert in the nuances of portfolio loans.
Jumbo Loan Amounts
When you are seeking a loan amount that exceeds the conforming loan limits set by Fannie Mae, Freddie Mac, and Ginnie Mae, your likely option is a jumbo loan. Jumbo loans offer higher loan limits than traditional mortgages, and many fall into the portfolio loan category. Jumbo loan limits vary by lender, but can reach into million-dollar loan amounts. In fact, some lenders offer super jumbo loans that can range from $10 million to $20 million, and a few will go as high as $25 million or more. Regardless of the loan amount, each lender underwrites the jumbo loan based on their own standards.
Borrowers Without W-2 Income
A portfolio loan may also be the right fit when a borrower has income that fluctuates or is harder to document than traditional W-2 wages. Borrowers who are self-employed, who have high income but low credit scores, or who have high net worth but little documented income may all benefit from the flexibility of a portfolio loan. Because the lender determines their own guidelines, they can often look at the overall financial fitness of the borrower when qualifying them for a portfolio loan.
Portfolio mortgages are typically more favorable to property investors, especially if the investor wants to have more than four mortgages. Generally, the number of properties an investor can purchase isn’t limited in portfolio loan programs. Another benefit for investors is that these loans have few requirements regarding the condition of the property. This can be an advantage for a borrower looking to buy an unusual property or purchase an older home for renovation. In addition, the lender can often take into account the cash flow generated by the property when qualifying the borrower.
Properties That Don’t Meet Conventional Loan Guidelines
If certain situations make a property ineligible for traditional financing, a portfolio loan could be the solution. For example, the property may need significant repairs due to issues with electrical wiring, the roof, or the foundation. The property may have water damage, missing appliances, damaged flooring, or walls. Or the property is unique and falls outside the guidelines of Fannie Mae or Freddie Mac. There could be challenges related to occupancy or the insurance for the condo complex. There may not be any comparable homes for the appraisal, or a zoning issue may arise. The flexibility of the portfolio loan program would allow the lender to review these challenges individually and determine what is acceptable to them.
When you aren’t a U.S. citizen, purchasing a property may seem out of reach. Again, a portfolio loan could be the answer. Some lenders have developed loan programs to fit the needs of non-resident aliens. Exact guidelines vary by lender, but the borrower can expect to be asked for documents related to income, assets, and employment. Borrowers may find it beneficial to work with a lender who is willing to guide them through the loan process and help with the acquisition of required documents.
Conforming loans have strict guidelines when it comes to credit issues. A portfolio loan may have the flexibility a borrower is seeking when they have a low credit score due to a derogatory event, such as a foreclosure, short sale, or recent bankruptcy. Traditional mortgages require a borrower to wait a minimum of three years before applying for a loan. The waiting period for a portfolio loan may be less. The lender also has the option to consider all the factors related to the event. If the event was temporary and that the borrower has recovered, the lender may decide to move forward with the loan.
It would be impossible to list all the situations in which a portfolio loan could be an option. Because each lender determines what is acceptable to them, a loan can often be tailored to fit the borrower and their unique situation. For example, a borrower that had a tax issue, a judgment, or a lien may be able to qualify for a portfolio loan based on strong income, high credit scores, and the resolution of the issue. A borrower seeking a cash-out refinance may not qualify for a conforming loan, but a portfolio lender may find the borrower’s overall financial situation mitigates the risk of a loan. It all depends on the lender and their individual guidelines.
Another area of flexibility for a portfolio loan comes from the special features offered with the program. Some common features include privacy mortgages with title vesting, pledged asset options, and cross-collateralization financing, to name a few. Not all portfolio lenders will offer these features. It depends on the lender and their expertise with the program.
Cross-collateralization can allow a borrower to use the equity in an existing property to purchase a new home or another investment property. The down payment on the new property can often be reduced or eliminated by using this feature. It can also be a means to add more security to the new loan. Although cross-collateralization would not be available in a traditional loan, it can be used with a portfolio loan to add flexibly to down payment requirements when a borrower has substantial equity in another property.
Title Vesting Options
Some borrowers may want to hold the title to their property as a partnership, corporation, trust, or LLC. For example, a property investor may want to limit their personal liability. They can minimize their exposure to claims that have large potential liability by holding the property title in an LLC or corporation. Or not holding the property title as an individual may ensure a level of privacy if the owner is well known, such as a sports figure, actress, or successful business owner. Limiting liability and gaining privacy can both be accomplished through a portfolio loan with title vesting.
Pledged Asset Options
A lender may allow a borrower to use a pledged asset to secure their loan in a portfolio program. This can be done to reduce the down payment amount needed for the loan. Cash, securities, stocks, and bonds are often used as pledged assets. Although the asset is pledged to the lender, the borrower still has ownership of it. The benefit to the borrower is that they can keep their investment strategies in place and not liquidate assets to come up with a down payment. They are able to defer capital gains since there isn’t a sale of the assets. Plus the increased down payment could allow for a lower interest rate.
The Cost Trade-Off
As you would expect, a trade-off goes along with the additional flexibility offered by a portfolio loan. By their nature, portfolio loans are considered a higher risk loan. Therefore, the interest rates, closing costs, and fees are generally higher for a portfolio loan. This is to be expected. The lender is taking on additional risk, while the borrower gets the benefit of a loan that other institutions would not offer.
The amount of the down payment will vary by lender. When the down payment is 20 percent, the expense of private mortgage insurance is avoided. Although there may be a prepayment fee, federal law limits the amount and the period when prepayment penalties can apply, generally three years or less. Depending on your lender, you may also be able to negotiate prepayment fees that allow you to refinance later.
Who offers portfolio loans?
Although there are some larger banks that offer portfolio loans, many smaller banks and credit unions are leaders in portfolio lending. Working with a lender that has specialized experience in this type of loan and provides a diverse range of options can be helpful. Because these are not cookie cutter loans, selecting an expert who understands the nuances of custom loan programs can allow you to get the best options for your unique needs.
Portfolio loans offer flexibility for borrowers with nontraditional income, large loan amounts, unusual properties, and unique situations.
The power of a portfolio loan is its ability to accommodate borrowers who do not fit into the rigid framework of a traditional loan. When the lender sets their own guidelines, they can decide if a borrower’s strengths outweigh any concerns. Portfolio lenders have the ability to design a loan that meets the borrower’s needs in addition to their own. With enhanced program features, a portfolio loan can be used to reduce the down payment, provide additional privacy, or keep an investment strategy in place. If you have hit a wall when applying for a conforming loan, it’s time to explore the flexibility of a portfolio loan.
The Power of Portfolio Loans Is Flexibility
This blog post was published by Axos Bank on May 13, 2019 and last updated on May 13, 2019.