Real estate investors have a wealth of options when it comes to investment property financing. In fact, real estate offers more financing options than just about any other sector. Needless to say, this makes implementing a wide range of real estate investment strategies extremely accessible. While you are surely familiar with most of the conventional real estate investment loans, you are probably unaware of some of the non-conventional financing methods. A good example of this is a portfolio mortgage loan. So what are portfolio lenders? Are portfolio loans a good idea? And how do you qualify for a portfolio loan? In this article, we will introduce you to portfolio loan lenders and explore whether or not it is a good financing method for real estate investors.
What Are Portfolio Lenders?
The term «portfolio lenders» refers to any entity that keeps the mortgages it issues on the books. Unlike traditional loan providers, portfolio lenders don’t sell these loans on the secondary market and they typically take on more risk. This increased risk translates into higher mortgage interest rates and fees. However, the fact that the loan remains in the bank’s portfolio allows these lenders to offer more flexible terms and a relatively lax approval process.
Let’s now delve into the reasons why you should strongly consider working with real estate portfolio lenders.
Why You Should Turn to Portfolio Lenders
When buying investment property, securing a good financing package should be every real estate investor’s top priority. Getting a mortgage with favorable terms is what makes investing in real estate a profitable venture. In any event, here are some of the advantages of opting for portfolio lenders when you are looking for an investment property mortgage.
1- They offer more flexibility
As we mentioned earlier, working with portfolio lenders offers real estate investors a considerable degree of flexibility. In fact, the best portfolio lenders are often small and privately-owned banks that don’t have to abide by any strict regulations. This allows them to structure each loan on a case by case basis and provide mortgages that are tailored to the needs of the borrower.
2- Portfolio lenders have an easier approval process
Another advantage of working with portfolio home loan lenders is the easy approval process that they offer. Unlike investment loans that fall under Fannie Mae and Freddie Mac regulations, mortgages that are issued by portfolio lenders don’t come with a complicated approval process. In fact, most banks set their own criteria and many of them don’t prioritize income and credit when issuing loans. This makes this loan a good option for self-employed individuals as well as anyone with less than ideal credit.
3- These loans are ideal for buying multiple investment properties
Portfolio loans are not just flexible when it comes to mortgage terms and credit requirements. In fact, they are also suited for a wider range of real estate investment strategies compared to conventional loans. This is especially the case when implementing strategies that involve buying multiple rental properties. While conventional mortgage providers might be able to accommodate up to four or five investment properties, most portfolio lenders have no restrictions with regards to the number of properties.
4- A portfolio loan can help you buy a distressed property
Due to the inherent risk that comes with distressed properties, the vast majority of conventional lenders tend to be reticent when it comes to financing these real estate investments. By contrast, most portfolio lenders are willing to take on the risk as long as the borrower presents a coherent renovation plan. If you plan to fix & flip an income property, portfolio loans are worth considering.
At this point, you are probably asking yourself the following questions: «How can I find portfolio lenders near me?» and «How can I qualify for a loan?». The next section will answer these questions in detail.
How to Qualify for a Portfolio Loan
Securing a portfolio loan can be done in a few simple steps. Here is how you should approach the process.
Related: Rental Property Mortgage: The Ultimate Guide to Getting Approved
1- Find a portfolio lender
Finding a portfolio lender in your area is fairly easy. In fact, there is a multitude of ways to do this. Here are some of the most effective approaches:
- Explore your real estate network.
- Talk to a real estate agent.
- Ask your local bank if they provide portfolio loans.
- Go to real estate investor meetings in your area and try to connect with local portfolio lenders.
2- Detail your real estate investment strategy
While portfolio lenders don’t put too much stock on personal credit and income, they still want to see a good investment strategy from the borrower. Be prepared to outline every aspect of your real estate investment plan and make sure to include accurate estimates and realistic projections.
Related: A Guide to Choosing the Best Rental Property Strategy: Airbnb vs Traditional
3- Pick a good investment property
The investment property that you pick is an extremely important factor when applying for a loan. As you would expect, portfolio lenders prefer investments that can turn a profit. For example, if you are planning on buying a traditional rental, you should focus your search on rental properties that have stable occupancy and low vacancy rates. The best way to do this is to use the Mashvisor property finder. This tool employs cutting edge AI technology that allows it to find the top income properties in a matter of minutes.
4- Have some cash reserves before applying
Cash reserves increase your chances of securing a loan. While the qualifications vary from one lender to the other, most mortgage providers require at least 6 months’ reserves. This ensures that the borrower is able to cover the initial monthly payments after closing.
The Bottom Line
If you value flexibility and lax credit requirements, portfolio lenders might just be the perfect option for you and your real estate business. Despite having higher interest rates and fees, they definitely offer an interesting alternative to conventional lenders.