Portfolio Lenders
Portfolio lender financing is a great option when you’ve maxed out the number of conventional loans you can take or if you need more flexibility.
Portfolio lenders, usually smaller banks or credit unions, keep these loans on their own books rather than selling them, allowing them to set their own rules.
Let’s explore how portfolio loans work.
Eligibility/Requirements
Portfolio lenders have more flexible eligibility requirements compared to conventional loans:
- Credit Score – Credit score requirements vary widely depending on the lender, but most will still expect a score of at least 620.
- Debt Service Coverage Ratio (DSCR) – Many portfolio lenders focus on the DSCR, which measures the property’s income against the debt payments. A higher DSCR (usually above 1.2) increases your chances of approval. Improving cash flow on your property can significantly improve how easy it is to qualify for these loans so be sure to utilize my checklists for improving cash flow to help your property and yourself.
- Financial Statements – Portfolio lenders often require more detailed financial documentation, including personal financial statements and tax returns.
Owner-Occupancy Requirement
Portfolio loans can be used for both owner-occupants and investors:
- No Owner-Occupancy Requirement – Unlike many traditional loans, portfolio lenders don’t always require owner-occupancy. This makes them a great option for investors looking to buy rental properties directly.
Down Payment
Down payments for portfolio loans can vary, but here are some general guidelines:
- Investor Down Payment – Typically, portfolio lenders will require at least 20% down, but some may allow as little as 15% depending on the strength of the deal and the borrower’s financials.
- Multi-Family Properties – For 2-4 unit properties, the down payment may be higher, often around 25%.
- Self-Directed Retirement Account Loans – Portfolio lenders will often require 35% or more down when providing a portfolio, non-recourse loan to buy a property in your self-directed retirement account.
Loan-to-Value (LTV) Ratio
Here’s a breakdown of how the Loan-to-Value (LTV) ratio typically works for portfolio loans:
- Standard LTV – Most portfolio lenders offer loans with an LTV of up to 80%, meaning you’ll need to have at least 20% equity in the property. This aligns with traditional lending practices and helps mitigate risk for the lender.
- Lower LTV for Higher Risk – If the property is deemed higher risk (e.g., unique properties or those in less desirable areas) or if you have a lower credit score, the lender may require a lower LTV, such as 70-75%. This provides an additional buffer against potential losses.
- Non-Recourse Loans – For non-recourse loans, where the lender can only seize the property as collateral and cannot pursue the borrower’s other assets in case of default, the lender may require 35% or more down. This higher down payment requirement compensates for the increased risk the lender takes on with a non-recourse loan. You’d see this when buying a property in your self-directed retirement account because the lender can’t go after other assets in the retirement account; just the property would be the collaterol.
Interest Rates
Portfolio loans often come with adjustable rates, but terms can vary:
- Adjustable-Rate Mortgages (ARMs) – Many portfolio loans are ARMs, typically with 3, 5, or 7-year fixed-rate periods before adjusting. The rate may then adjust annually based on a market index.
- Fixed-Rate Options – Some portfolio lenders offer fixed-rate loans, though these are usually for shorter terms like 15 years. Fixed 30-year loans are much less common and may be impossible to find.
Amortization Period
Portfolio lenders offer various loan terms:
- 30-Year Amortization – While portfolio loans often come with a 30-year amortization schedule, they may have shorter loan terms with balloon payments after 5, 7, or 10 years.
- Shorter-Term Loans – Some portfolio loans have 15- or 20-year terms, but you’ll need to plan for larger monthly payments.
Private Mortgage Insurance (PMI)
PMI is generally not required for portfolio loans:
- No PMI – Since most portfolio lenders require at least 20% down, PMI is usually not a factor. However, some lenders may offer loans with lower down payments that could include mortgage insurance, depending on the LTV.
Loan Limits
Portfolio lenders often don’t have set loan limits like conventional loans:
- No Hard Loan Limits – The amount you can borrow with a portfolio lender depends on the lender’s policies and your ability to qualify based on income and property performance. There’s more flexibility compared to conventional loan limits.
- Large Loans for Experienced Investors – If you’re an experienced investor with a strong financial profile, some portfolio lenders may approve larger loans.
Number of Loans Allowed
Portfolio lenders don’t impose strict limits on the number of loans you can have:
- No Limit on Loans – Unlike conventional loans, which cap you at 10 loans, portfolio lenders can issue multiple loans to the same borrower, making them a go-to option for scaling your real estate portfolio. However, your ability to qualify will depend on your income, property performance, and financial standing.
Seller Concessions
You negotiate the amount of seller concessions directly with the seller when making your offer to buy the property. However, the lender will determine how much of those concessions you’re allowed to use toward your closing costs. This can vary by portfolio lender:
- Seller Concessions – Portfolio lenders tend to be more flexible, but they set limits on how much of the seller concessions you can apply toward closing costs. Typically, you may be allowed to use up to 3-6% in concessions, depending on the lender’s policy.
Waiting Period After Major Financial Events
Portfolio lenders may offer shorter waiting periods after financial issues:
- Bankruptcy Waiting Period – Many portfolio lenders require a waiting period of 2-4 years after a bankruptcy, but some may approve loans sooner depending on the borrower’s recent financial history.
- Foreclosure Waiting Period – After a foreclosure, you typically need to wait 2-4 years, though some portfolio lenders may allow exceptions based on the property and borrower’s recovery.
Refinancing Rules
Portfolio lenders often offer flexible refinancing options:
- Rate/Term Refinance – You can usually refinance a portfolio loan to adjust the rate or term, though this may involve renegotiating with the lender.
- Cash-Out Refinance – Many portfolio lenders allow cash-out refinancing, though the maximum LTV is typically 75-80%, depending on the lender and the property’s performance.
- Recast – You may be able to recast a portfolio loan, but it will depend on the lender.
Property Types Eligible
Portfolio lenders are open to a wider variety of property types:
- 1-4 Unit Properties – Portfolio lenders will finance single-family homes and small multi-family properties.
- Commercial and Larger Multi-Family – Unlike conventional lenders, portfolio lenders are often willing to finance larger multi-family or mixed-use properties, as well as commercial real estate.
Special Loan Features
Portfolio loans come with a few key benefits and features:
- Flexible Terms – Portfolio lenders can customize loan terms to meet your needs, including loan term lengths, amortization schedules, and interest rate structures.
- Relationship-Based Lending – Many portfolio lenders value relationships, so maintaining a strong banking relationship, such as deposits or other business with the bank, can help you get better terms or approval.
- Buying In Entities – Many portfolio lenders will allow you to buy in the name of an entity like an LLC. Most will require you—or someone else—to sign and personally guarantee the loan even if you’re buying in an LLC or other entity. If you were able to find a lender that does not require you to personally guarantee the loan—a non-recourse loan—you would expect to see a much higher down payment in the 35% or more range.
Approval and Underwriting Process
Portfolio lenders often have faster underwriting processes:
- Faster Underwriting – Since portfolio lenders don’t need to sell their loans to the secondary market, they can often underwrite loans more quickly. Some loans can be approved in as little as 24-48 hours.
- DSCR-Based Underwriting – Lenders will often focus on the Debt Service Coverage Ratio (DSCR) of the property. As long as the property can generate sufficient income to cover the loan payments, you may have an easier time qualifying.
Risks and Considerations
There are a few important things to consider with portfolio loans:
- Adjustable Rates – The interest rates on portfolio loans are often adjustable, which can increase your payments if rates rise. Make sure you understand the risks of an ARM if you choose this option.
- Balloon Payments – Some portfolio loans come with balloon payments after a certain period, meaning you’ll need to refinance or pay off the balance in a lump sum. This could create challenges if market conditions change and adds a significant amount of additional risk to your investing.