What is a Real Estate Portfolio Loan?

If you’re a first-time real estate investor with no credit and cash, or a small business owner looking to refinance all your rental properties into one loan, chances are you’ll have a hard time finding a lender.

Real estate mortgages are among the most highly regulated industries, imposing some of the most stringent requirements on borrowers in order to ensure another Great Recession does not occur. As such, real estate investors looking for more flexible and creative financing often have to look outside the box at alternatives.

As a group, the alternative loan programs available out there are largely considered portfolio loans, and in this article, we’ll discuss what they are, the different types available for real estate investors, and the benefits and downsides to them.

The definition of a Portfolio Loan

A portfolio loan is any real estate mortgage or loan that is held by the lender and is not sold to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac), two major government sponsored entities responsible for stabilizing the U.S. residential housing market. In order to understand this concept it helps to think of the mortgage industry as a business, and in this sector the individual lenders that meet with a borrower, qualify the buyer, and originate the loan create a product which are the actual mortgage documents.

These products range from FHA loans, VA loans, and conventional loans.

These products are then sold to Fannie Mae or Freddie Mac, so long as they meet certain guidelines, and will be traded in what is called the secondary market. Fannie and Freddie may bundle these into different packages, many of which are often referred to as mortgage-backed securities, which are then bought and sold openly by major Wall Street investors, pensions funds, and the like.

Because these enterprises take the additional step to guarantee the ‘loan products’ that they ensure, meaning in the event of a default they will put up the funds, the underlying mortgages have to meet a ringer of certain requirements that often exclude many real estate investors.

What are the Fannie Mae Guidelines

In order to better understand what qualifies as a portfolio loan, it may first be helpful to cover what makes a loan qualify to be bought and sold. The restrictions placed on loans that are traded in the secondary market are often referred to as the Fannie Mae guidelines, as are as follows:

• Maximum Loan limits. One of the greatest characteristics of a Fannie Mae loan is the actual loan size. There are certain limits put into place, that vary depending on the county within which the property is located, that cap the maximum purchase price for the properties that are secured. Any loan above, what are called ‘conforming loan limits’ will preclude the loan from being purchased by Fannie or Freddie, and will classify it as a portfolio loan. For example, if you’re looking to purchase a $600,000 home, in an area where the conforming loan limit is $450,000 it is highly likely the loan you ultimately end up getting is a portfolio loan.
• Maximum 45 – 50% Debt-to-income (DTI) ratio. The debt-to-income ratio is a back-of-the-envelope formula used by lenders to determine your ability to afford a loan. In other words, it’s a reflection of your ability to pay back the mortgage. To calculate a borrower’s DTI ratio, a lender will take the total of their monthly debt obligations, whether it’s for a car, student loan, credit card, etc., and divide it by their total monthly gross income. If that percentage is greater than 45% in most cases, or 50% in the event that the loan application is processed manually, then the borrower will either have to get a portfolio loan that allows it, or have to pay down their debts.
• Minimum 2 Years of Employment. Borrowers hoping to get a loan that meets Fannie Mae guidelines will typically be required to show that they have 2 years of employment evidenced by tax returns, W2 forms, pay stubs, and the like. This often means that borrowers who are self-employed and take too many tax deductions often have to turn to portfolio loans to finance their purchases.
• Minimum 3% Down payment. Across the board loans guaranteed by Fannie Mae must have a minimum of 3% down payment put into the property by the borrower on all residential one to four unit properties. On FHA loans, the minimum down payment is 3.5%, and in the case of both some form of the mortgage insurance will be required until at least 20% of the loan principal is paid by the borrower.
• Minimum 580 or 620 Credit score. An additional requirement for non-portfolio loans is the underlying borrower’s credit scores typically have to be at least a 620 on conventional loans, and at least 580 on FHA loans.
• Loan Limited to the Appraisal Amount.  An appraisal is the key method lenders use to determine a property’s value. This value then becomes the basis of the approved loan amount, which means that there’s no such thing as ‘no appraisal’ loans when looking to qualify for Fannie Mae guidelines. Therefore any loan that waives an appraisal requirement is most like a portfolio loan.
• No Major Fixers. Due to the appraisal requirement that every loan is subject to, the implicit requirement is that the property is in good condition. Rarely are mortgages for properties in need of major structural work underwritten and approved, as this has a significant effect on the value of the asset. Real estate investors especially who are looking for any type of financing for homes that are less than stellar condition won’t qualify and meet the Fannie Mae guidelines.
• Only One Asset. Federal guidelines place a limit on the actual number of properties that you are able to finance. Specifically, one loan can only cover one real estate asset. This often means that someone looking to refinance all of their rental properties into one loan will need to seek a portfolio loan.
• Real Estate Property Type. Lastly, Fannie Mae has strict guidelines on eligible property types. For the most part, borrowers are able to finance traditional resident and commercial property, however, for unique real estate assets like brand new home subdivisions, or the refinance of multiple properties, or self-storage facilities, borrowers will need to also seek a portfolio loan.

Any loan that a real estate investor decides to get that lies outside of these guidelines is most likely a portfolio loan that won’t be sold to Fannie Mae, but rather kept on the lender’s books.

Types of Portfolio Loans

There are many different types of portfolio loans available for borrowers who won’t be able to qualify for traditional loan programs based on the guidelines that we covered above. These include:

• Fix and flip loans. Fix and flip loans are short-term, real estate loans that re typically interest only and have a balloon payment due within a 10 to 18 month time period from the date of origination. They are largely designed to help a real estate investor buy distressed properties, fund the repairs, and resell the property for a profit.
• Jumbo Loans. Jumbo loans are another type of residential property mortgage that are ineligible to be sold on the secondary market, and are often only made as portfolio loans. Jumbo loans are much more common in high-cost areas, such as New York, Los Angeles, and parts of South Florida where the average home sells north of $750,000 and the conforming loan limit is much lower. The sad news is even if a borrower plans to occupy a home as their own, and meets all of the other Fannie Mae guidelines they’ll still need to pursue getting a portfolio jumbo loan.
• Blanket Mortgages. A blanket mortgage is a type of loan that may be used to finance the acquisition or refinancing of many properties. It is the ideal portfolio loan for a real estate investor who wants to buy a collection of single-family residences, or currently owns a portfolio of properties and wants to combine all the separate, individual mortgages into one blanket mortgage. With a blanket loan, the entire portfolio of properties acts as collateral for the lender. For example, if an investor owns 5 homes that are valued at $500,000 a piece and gets a $1 million blanket loan, in public records each home will show a $1 million loan recorded against the title. The reason why blanket mortgages are portfolio loans is that Fannie Mae restricts loans that cover more than one property.
• Mobile Home Loans. Loans extended to the purchase of mobile homes, and mobile home parks are also often portfolio loans. Because they do not have a permanent foundation, mobile homes are not considered a single-family residences under the guidelines for loans in the secondary market. Additionally, the loan amounts are typically so small, in comparison to those of traditional, stick-built housing, that it often makes more financial sense for lenders to keep them on the books, as opposed to selling them to Fannie or Freddie.

Benefits of a Portfolio Loan

The beautiful aspect of portfolio loans is because the guidelines are set by an individual lender and not by Fannie’s or Freddie’s standards, borrowers will find them to be much more flexible. These are just several ways where getting a portfolio loan can actually benefit you, especially if you are a real estate investor:

• Unlimed Loan Amount. The greatest benefit of getting a portfolio loan is there is no maximum loan amount. Because these loans will be kept by the lender and not traded, the loan amounts are ultimately unlimited. That being said certain lenders will have their own in-house requirements. For example, a lender specializing multi-million dollar celebrity homes will have a very much different maximum loan amount than a lender that finances mobile homes for first-time home buyers.
• Little to No Down Payment Requirements. Portfolio lenders are often more willing to finance properties with little to no money down. This is especially the case for fix and flip borrowers, who are actually able to secure loans that finance more than 100% of the purchase price in order to cover the repair costs. While for traditional loan products financing anything with less than a 20% down payment would typically require mortgage insurance, usually portfolio lenders do not impose a similar requirement.
• Borrowers with Low to Now Credit Considered. One of the greatest benefits of getting a portfolio loan is thta you have greater chances to qualify even if your credit is terrible or non-existent. This can be a huge benefit especially for foreign citizens who are new to the country and have yet to establish credit, or those recovering from financial troubles.
• Cash Only Income Considered. Because portfolio lenders have much more leeway, they can often qualify borrowers with information that a traditional conventional lender could not use, such as bank statements. There are many lenders out there that will extend financing based solely on the past 1-2 years of bank statements, which can be extremely beneficial for a person or business that most commonly operates in cash.
• Self-Employed and Irregular Income. Along the same lines, a huge benefit of portfolio loans is the beneficial treatment of self-employed borrowers and borrowers that have irregular income streams. For traditional or conventional loans, self-employed borrowers, especially those that write off all their income for tax purposes typically face a much tougher time qualifying and typically have to wait years before meeting Fannie Mae standards. Portfolio loans act as an excellent gateway.
• Flexible Mortgage Terms. Furthermore, your mortgage terms may be more flexible depending on the lender. For example, your portfolio lender may allow deferred interest payments, interest-only payments, balloon payments, 5, 10, 15-year terms. They may allow for tiered interest rates, where in one year the interest rate is a set amount, that goes down for each subsequent year. The sky is really the limit for how creative a lender can be with the mortgage terms.
• Able to Finance Multiple Properties. Best of all, with portfolio loans you are able to finance multiple properties at once. This is huge, let’s say if you are an investor that owns over 100 doors that your acquired one by one using the BRRRR (Buy, remodel, rent, refinance, repeat) method. Trying to manage 100 different loans is not only time-consuming, but also incredibly costly, so being able to do a portfolio loan can be a huge financial benefit.

Downsides of a Portfolio Loan

With all the excellent perks that come with getting a portfolio loan, it is important to keep in mind that there are certain downsides that don’t make them the best choice for every potential borrower:

• Higher Interest Rates. If you get a portfolio loan you’re more likely than not going to have to pay for all the flexibility it provides with higher interest rates. Where the average interest rate for a traditional mortgage might be 3%, the average interest rate for a portfolio loan can be as much as two to nine percentage points higher. This is undoubtedly because portfolio loans are made with the lender’s own money, which means they are taking on a greater risk and assuming greater responsibility for the outcome of the loan. A higher mortgage rate is designed to effectively offset that.
• Higher Origination and Closing Fees. Similarly, another downside to portfolio loans is they will often have greater fees in the form of origination fees, closing fees, application fees, and prepayment penalties. These are all again designed to offset the risk of being so much more flexible. That being said the increased costs associated with a portfolio loan, often pale in comparison to the higher down payment requirements these same buyers might face if they were trying to qualify for a traditional loan. For example, a self-employed buyer that decides to get a portfolio loan that charges them $25,000 in total loan fees to close, still ends up financially better than if they had gotten a conventional loan that on a $600,000 home would’ve required a 10-20% down payment, or $60,000 to $120,000.
• Fewer Lenders. Another downside to portfolio loans is there are few lenders that do them. Compared to the behemoth amount of lenders that offer traditional loan products, there is only a small number of lenders that are able to offer borrowers creative financing. This can make it tougher for a borrower to find the right one, especially if they’re looking for financing for a niche asset. For example, a real estate investor looking for a tiny house on wheels lender will have a much tougher time as there are so few lenders that focus within this niche.
• Fewer Consumer Protections. Lastly, the biggest downside to a portfolio loan is the lack of consumer protections. Mortgages subject to federal guidelines have certain rights and requirements put into place to protect the borrower from predatory practices. With a portfolio loan then, it can very much be like the Wild West, where a borrower has to put a lot of time and effort in pre-vetting a lender to ensure they won’t be taken advantage of, squeezed, or have their properties taken without due process.

Use a Portfolio Loan to Get Unstuck

The most common roadblock for many to purchase real estate whether for their personal use or for their business is qualifying for a loan. As we’ve covered in this article there are many standards that traditional mortgages like an FHA, VA, or conventional loan require that may not fit everyone’s needs or current situation. For this reason, a portfolio loan is the best approach anyone can take to keep moving forward. For guidance on the best portfolio loan to get give me a call at 9177404325.

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