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Short Term Investment using Portfolio Loans to Buy a Home

Use a Short Term Portfolio Loan to Buy Now, Save Later

Short Term Solutions

It’s been a few years now since your bankruptcy, foreclosure, short sale or deed in lieu, and you desperately need the tax break, piece of mind, and the investment vehicle of owning another home.

You’ve re-established your credit, your income is stable, and you’ve saved up a significant down payment, BUT…….you’re just outside the waiting periods required to buy using Conventional, FHA, VA or USDA financing.  What do you do?

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Portfolio loans are often dismissed as an option because many people don’t understand the value, or options available using this advanced method for buying your new home.

Over the past couple of years, portfolio loans have become more widely available, and more widely affordable, opening up a whole new channel of options for savvy homebuyers that understand the wealth building value of homeownership from an investment perspective.

I’m not talking about buying investment properties necessarily, however most real estate investors already understand the value of making an upfront investment now, to realize exponential financial gains over a period of time.

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Using this “investment” mindset, and taking an educated and empowered approach to buying your home sooner using a portfolio loan is not only smart now, it will allow you realize even greater savings in the future.

Demystifying Portfolio Loans

Unless you have a stock pile of money and have the ability to buy your next home with cash, you’re going to need a home loan to finance the majority of the purchase price.  I like to break down home loan financing options into 3 categories:

Traditional Financing

This includes Conventional, FHA, VA, USDA and sometimes Jumbo financing.  Traditional financing typically has standardized underwriting guidelines, and is available through any lender you choose to do business with.  Traditional financing will have the most strict underwriting guidelines, and waiting periods.  A traditional financing solution is most likely your end-goal, but may be just out of reach when you start the home buying process.

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Portfolio Loans

A portfolio loan is a little more flexible than traditional financing.  The term portfolio essentially means that the investor will typically hold, or sell the loan to an investor that keeps the loan in their private investment portfolio.  Portfolio loan underwriting guidelines will vary much more than traditional guidelines, and in many ways will be similar among other portfolio loan programs.

Common features of Portfolio loans include:

  • Available for owner occupied or investment property
  • Minimum 10% down payment, more if you have lower credit scores
  • Requires full income and asset documentation to qualify
  • Up to 50% debt to income ratio is common
  • Will allow lower credit scores but will require compensating factors, such as larger down payment
  • Interest rates range from high 4% to 9% for first mortgages
  • Interest rates range from 8% to 10% for second mortgages
  • Origination fees will typically run between 2% to 3% of the loan amount
  • Allows for stand alone second mortgages
  • Allows for shorted waiting periods after Bankruptcy, foreclosure, short sale or DIL
  • Will typically have a 90 day pre-payment penalty (3 interest payments)

Hard Money Loans

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Hard money, or private money loans are by far the most flexible, and the most expensive option of the three.  In a bind, hard money loans are a great solution to short term challenges that would prevent you from using a traditional, or even a portfolio loan.

Common features of a Hard Money loan include:

  • Typically available for investment property only, but some lenders will do owner occupied
  • Minimum 30% down payment, and will be determined by the overall “deal”
  • Many times will not take income or credit score into consideration
  • Interest rates range from high 9% and up
  • Origination fees will typically run between 2% to 3% of the loan amount
  • Allows for shorted waiting periods after Bankruptcy, foreclosure, short sale or DIL

Buy Now, Save Later

This is where you can really get creative with these financing options, and put yourself in a position to make a little bit higher investment now, and refinance out of your “bridge loan” solution into a traditional financing option as soon as you are eligible.

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When considering a portfolio or hard money loan, it really just comes down to doing the math.  Is the cost difference between traditional, or portfolio loan program greater than the tax deductions, and equity growth opportunity of owning the home.

Here are a few things to consider in terms of long term and short term factors:

Short Term Considerations

  • Do you have an opportunity to buy your “dream home” now – and it just cant wait?
  • How long is the wait before you can refinance into a traditional mortgage?
  • Can you easily afford the extra upfront and monthly cost for a short period of time (less than 3 years)?
  • Do you need the tax write-off now? (higher interest rate = higher write-off!)

Long Term Considerations

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  • Will home prices be significantly higher if you wait?
  • Will you lose the opportunity to buy your “dream home”?
  • Are homes appreciating quickly in value in this area?
  • Do you plan to live in the home for more than 10 years?

Making Smart Financial Decisions

Buying a home for your family is very emotional.  If you are considering a short term alternative financing solution, you need to put your “business” hat on.  If you let your emotions rule your decision making process, you run a high risk of becoming over extended, or throwing good money after bad, or even setting yourself up default.

Investing hundreds of thousands of dollars in real estate is serious business.  It’s one of the single most profitable investments you can make, both economically and emotionally.  And it’s also one of the most secure investments you can make, if you do your homework, and make educated decisions.

Using short term financing solutions is not for everyone, however, my experience is that it does work for most people, most of the time.  If it’s not an option for you, you will usually figure that out very quickly.  If you don’t have the higher down payment, or the credit scores to qualify, or the income to afford the higher payment of the short term, this isn’t even an option you should consider.

Crunch the numbers. Calculate the risk.  Make an informed decision.

About Your Expert

Scott Schang

As a 19 year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues, and making sense of complicated real estate and mortgage topics on this website since 2007

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