Real estate investors often require financing options to finance their deals, and portfolio loans are a great solution… in some situations. In this blog post, we will discuss everything you need to know about portfolio loans and how they can benefit real estate investors.
What is a Portfolio Loan?
A portfolio loan is a type of loan that is held by the lender instead of being sold to a third-party investor. This means that the lender has more flexibility in setting the loan terms and can consider additional factors beyond just the borrower’s credit score.
Traditionally, many real estate investors will only consider portfolio loans once they’ve met the loan limit for more traditional financing options like VA, USDA, FHA and conventional loans. That’s because many portfolio loans are not 30-year fixed rate financing.
How Common Is Portfolio Financing?
The overwhelming majority of buyers are not utilizing portfolio loans. The following shows the loan type for a large sample of buyers in 2022.
And most buyers are utilizing fixed rate financing. The following shows what percentage of buyers are utilizing fixed-rate versus adjustable rate mortgages. Many portfolio loans are going to adjustable rate mortgages. There can be exceptions to this; for example we have a local lender that has a portfolio product that is fixed if you do a 15-year amortization/term.
Why Portfolio Loans Over More Traditional Financing?
In some rare cases, real estate investors will choose portfolio loans for one or more of the following reasons:
- They’ve exceeded their loan limit (usually 10 loans per social security number and/or tax return) on more traditional 30-year fixed rate financing (VA, USDA, FHA, Conventional)
- They’re wanting to buy in an LLC (for liability and/or partnership purposes)
- They’re looking for speed/ease of underwriting
- They’re only planning to hold the property for a short time and don’t need/want 30-year fixed rate financing
Benefits of Portfolio Loans for Real Estate Investors
Here are some of the more common benefits of getting portfolio financing:
- Flexible underwriting: Portfolio loans offer more flexibility in underwriting criteria compared to traditional loans. This means that investors with a less-than-perfect credit score or unique financial situations can still qualify for a loan.
- Higher loan amounts: Portfolio loans can offer higher loan amounts compared to traditional loans, making them an ideal financing option for larger real estate investments.
- Customizable loan terms: Lenders can customize the loan terms to meet the specific needs of the borrower. This means that investors can negotiate terms that are more favorable to them, such as lower interest rates or longer repayment periods.
Types of Properties that Qualify for Portfolio Loans
Portfolio loans can be used to finance a variety of property types, including:
- Residential properties: Single-family homes, multi-family homes, condos, and townhouses.
- Commercial properties: Office buildings, retail spaces, warehouses, and mixed-use buildings.
- Investment properties: Rental properties and fix-and-flip properties.
How to Qualify for a Portfolio Loan
Qualifying for a portfolio loan is similar to qualifying for a traditional loan, but sometimes with more flexibility in underwriting criteria. Here are some of the factors that lenders may consider when evaluating a borrower:
- Credit score: While a high credit score is always preferred, some lenders may be willing to work with borrowers who have lower credit scores.
- Income: Lenders will evaluate the borrower’s income and may require proof of income.
- Debt-to-Income Ratio (DTI): Lenders will evaluate the borrower’s debt-to-income ratio to determine their ability to repay the loan.
- Debt Service Coverage Ratio (DSCR): Lenders will often look at how much income is being produced by the property compared to the debt on the property. They may also look at the total income produced on ALL properties and the debt on ALL the properties.
- Property value and cash flow: Lenders will evaluate the value of the property being financed and the borrower’s ability to generate cash flow from the property.
Conventional Financing First
Most real estate investors will opt to utilize conventional financing before portfolio loans. Here’s a video covering conventional financing as well.
Low Down Financing Options
Typically portfolio financing will require 20% or more down. Typically at least 35% down if you’re trying to buy with a self-directed IRA or self-directed 401K. However, there are special financing options if you’d like to try to limit the amount you’re putting down.
Nothing Down Financing
It is near impossible to get nothing down financing with portfolio loans. However, there are some options for real estate investors looking to utilize nothing down financing strategies.
The following is a full video about nothing down financing for real estate investors.
Generally, the less you put down the harder it will be to have stronger cash flow on properties. The more you put down, the more likely you are to see improved cash flow. Check out the 88 strategies we have for improving cash flow for a comprehensive list of ways of improve cash flow on rental properties.
Analyzed Deals with Portfolio Loans
If you’re going to purchase a property utilizing portfolio loan, it is critically important that you analyze the property. You can utilize The World’s Greatest Real Estate Deal Analysis Spreadsheet™ to analyze properties purchased using any financing including portfolio loans.
Portfolio loans offer real estate investors a flexible financing option that can be customized to meet their specific needs. By understanding the benefits and qualifications for portfolio loans, investors can make informed decisions about their financing options and maximize their returns on real estate investments.