Is a Portfolio Loan a Good Option?

Not What You Think

When you hear terms like hard money, or private money, or portfolio loan, many people think about high interest rates, high fees and subprime loans.

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The truth about these types of loans is that they serve a very specific and much needed purpose in today's post market crash world of home loan financing.

When it comes to high rates and fees, you have to put this into perspective.  Today's interest rates are historically, very, very low.  If you also look at that same history, portfolio lending rates and fees are also at historical lows.

You might be surprised at the variety of options, and relative affordability of portfolio loans today.

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Why Use a Portfolio Loan?

Bad things happen to good people all the time, especially if you take into consideration the economic turmoil of the last 7-9 years.  It's these temporary hardships that prevent otherwise qualified, responsible and capable borrowers from financing your next real estate purchase, or refinance.

Time cures all financial hardships, and time also diminishes the return on investing in real estate.  The most significant reason for using a portfolio loan is to shorten that time that you're out of the market while you're waiting out the timeline until you can secure more traditional, lower cost financing.

While the upfront costs, and interest rates do tend to be higher than traditional and conventional financing options, when you consider the fact that you're only "renting" this money for a short period of time, the numbers will speak for themselves.

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When you compare the cost to borrow money to purchase a home, with the cost to borrow money for almost anything else, home loan interest rates are significantly lower than most installment loans or credit cards.

Most purchases you will use financing for will never appreciate in value, provide shelter, or build wealth.  When you put all of these factors into perspective, it is difficult to argue with the fact that even though it's a little more expensive up front, the return on this investment is difficult to match.

Common Uses for Portfolio Loans

One of the greatest benefits of portfolio lending is the wide range of unconventional scenarios and terms available.  Common reasons for using a portfolio loan include:

  • Buying a home after bankruptcy, short sale or foreclosure
  • Self employed borrowers
  • Foreign nationals
  • Cashflow qualifying investment loans
  • Second mortgages
  • High net worth, low documentable income
  • Fixing and flipping
  • Anything that falls outside of conventional guidelines

Long Term Investment Strategy

Purchasing real estate, whether to live in as your primary residence, or even buying an investment property, is a long term wealth building strategy.

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There are very few investments that are as secure, and provide returns like you will see with real estate.  While most home buyers are mainly concerned about rates and fees, only financially minded buyers truly understand and appreciate the bigger picture, and the importance of getting in, by any reasonable means necessary.

The reality is, most people will refinance, or sell and buy again before they will pay off a 30 year mortgage.  You have to think about buying real estate as a long term investment.

If you own real estate for 20 years, chances are you will borrow against it many times over that period of time.  When you compare the initial price to the long value, and then consider the total cost of the money borrowed against that property over that same period of time, you will be amazed at how far ahead you will be on this investment.

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Even if you have to borrow money on a temporary basis at a higher rate and fees, by the time you factor in the tax savings, and equity growth over the long term, you will instantly see that a long term vision will give you a significant return on your investment.

Getting the Best Rates and Fees

Non-conventional lending programs are best if you have good to excellent credit, are financially stable, have significant equity, or down payment, but have circumstances that prevent you from qualifying for traditional financing programs at this time.

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For homebuyers, if you have a 700+ FICO score, and a 20% down payment, you might be surprised at how affordable a portfolio loan can be.  It is not uncommon for interest rates to range from the low 5% range, all the way up to 8% to 9% range for second mortgages.

Making the Right Decision

Let's face it, nobody wants to overpay, that's not what we are talking about here.  You have to be in a position to refinance out of a portfolio loan within 1 to 3 years, or the cost of this loan may create too much financial stress on your family.

When you put portfolio loans into perspective, it's a short term solution that allows you to take advantage of a long term investment opportunity.  At the end of the day, it has to make financial sense, and you have to have the ability to be in a better financial situation in a reasonable amount of time.

When does it make financial sense? What is a reasonable amount of time? What are reasonable rates and fees?  Every situation is different, and everyone has their own financial goals.

Review your scenario with an experienced lender that has the ability to offer portfolio loans and traditional financing.  Don't approach this type of loan as an act of desperation, but as an educated decision, and a means to a long term financial end.

If you're having trouble finding a lender that you are comfortable having this conversation with, feel free to leave your comments or questions below, and I will do my best to point you in the right direction.

About 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

  • Barry Bruce says:

    Two cancer fights a few years ago (mine and our oldest son’s) cost us 14 months of far less than full-time. I’m still here and cancer-free, son passed away a couple months before his daughter was born. We did what we had to do to take care of the people in our lives — we’re not heros, we just did what almost everyone else on earth would have done to put people we love ahead money stuff. Consequences destroyed our credit history — scores ended up in the low 400’s and we came within an eyelash of losing a home to foreclosure. We’ve worked hard to begin repairing everything the past year and a half. Wife’s middle score is 585 at the moment (no judgments or liens against her; we filed married-separate returns along the way and the tax issues/liens are solely mine). My current middle score is 577 (but I have 2 federal tax liens for a total of $60,000). My wife made $50,000 (gross) during 2017 as a 1099 postpartum Doula (she provides overnight, in-home care of infants for people who have enough money to pay someone to do that so they — the parents — can sleep thru the night). She started doing that work in mid-December 2016, and she filed tax returns (only $300 or so of net income because she only worked a few nights in those 2 weeks, and we maxed all the deductions we could legitimately, but she did file returns for 2016). I make $96,200/year as the Controller for a large, local construction subcontractor — but, beginning is March or April of 2017 I began getting paid as an independent subcontractor (1099) also. Before I got sick I was rehabbing houses. Haven’t tried to complete, or completed, any such work since then, until now — have a house under contract and believe we can: (1) make $15-20,000 per rehab; and (2) complete 3-4 rehabs per year (using licensed contractors to complete the work of course — I work full-time). Found a home we want to buy. Purchase price is $675,000. Seller is a successful business-owner who lives in Florida (the home we want to buy is in Carroll County, MD). He owns the home outright and is willing to provide SOME seller financing but wants to keep that amount to a maximum of $150-175,000. Maximum FHA limit in Carroll County is $517,500 for 2018. My wife has $130,000 in liquid, available assets (the net settlement proceeds she received 3-4 weeks ago from a lawsuit related to a traffic accident) Given my tax liens: (1) we’re expecting to have the home we want to buy deeded in my wife’s name alone; and (2) we’ve been very careful to ensure that the settlement proceeds were deposited to a new account in which I have no ownership interest at all (and no money has been used from that account to pay any cost or expense on my behalf). Offered seller $75,000 down, and would like to keep it at that level so we can: (1) hang onto some capital to use for the rehabs; (2) get my wife a more vehicle that’s more appropriate for the overnight hours she works, and the fact that she sometimes works for clients in Baltimore City; (3) put to work to negotiate and settle a joint collection account (less than $5000) related to a car that got repossessed a couple years ago — a casualty of the way we’ve had to rob Peter to pay Paul post-cancer, and the fact that my wife couldn’t work and go to school (nursing) at the same time so we lived on my income alone — and my tax liens so we can use my own income to help us qualify for conventional financing in the next 2 years (unless keeping a portfolio loan makes more sense); and (4) have some cash reserves for the first time since my son and I got sick. We’re supposing that no one will allow my name on a mortgage contract until my tax lien are paid off, or until an payment plan is obtained that stays future collection efforts. Whether that assumption is so or not, “officially” or “unofficially”, my income will be available to my wife to help her make “her” mortgage payments and to take care of the rest of the family’s living expenses (if she pays off the $2500+/- balance she owes on her credit cards, the only expense she’d have against her DTI ratio would be a $250/mo student loan payment). The plan is to use a significant portion of the profits of the rehabs to pay down meaningful chunks of mortgage principal so we can get it under the FHA limit within 2 years (hopefully we’d have better options then than an FHA loan, but, we’d live with an FHA loan if we had to). In the end we’re hoping you can help us get my wife approved for a mortgage of that, combined with the $75,000 we’d like to put down as equity, would get us about $500,000 to give the seller at Closing (he’d hold the balance of the sale price for a couple years) and, hopefully, limit what we have to pay in the way of out-of-pocket closing costs to $15-20,000. With $50,000 of earnings from the 1 full year she’s been working, I know it would be difficult, at best, to get her qualified for that much. Forgive me, I’m just telling you what our hopes are. If you can’t, in fact, get her a mortgage of that amount, then we’d ask you to see how much you could get her and see if the seller would be willing to hold a larger second mortgage. If, by some stroke of unexpected extraordinary good fortune (combined with things I don’t know about what you might be able to get approved with a portfolio mortgage) you could get her/us more of a mortgage than we’re hoping for, then we’d be more grateful than we could ever hope to express, of course. I’m sure there’s something I’ve forgotten to tell you, and things you’ll need to know that I haven’t thought to tell you, but I hope I have given you enough here to have a feel for whether you can help us, or not. Thanks so much for your time.

    • Barry, thank you very much for taking the time to provide so much detail about your situation.

      I’m so sorry to hear that your Son lost his fight. You say you’re not a hero, but your strength and perseverance appear to be truly super-human!

      Ok, let’s start digging into all of this. First and foremost, I’ve introduced you to a lender friend of mine that has experience with FHA manual underwriting, and portfolio financing. You should have received an introduction already by email.

      The single most important thing you can do at this point is find a professional loan officer that has the experience and patience to help you navigate all of the steps you’re going to need to take to get back into pre-hardship financial condition.

      Steven (the loan officer I’ve introduced you to) is going to go through all of these things very slowly and purposely in order to explore all options, and choose the best path forward.

      There are many hurdles that I can see that need to be carefully understood.

      The big issue that jumps out at me here is obviously the credit scores. There is a lot we can do to help get your credit back in good shape, and my personal experience is that these types of scores are causes as much by not building good credit, as it is the reporting of negative credit. Time fixes all things with credit when being proactive and purposeful.

      The self employment is going to be a real challenge. All lenders are going to want to see a minimum 2 year history of self employment, but more important than that, it means that your income is going to be derived directly from your tax returns and averaged over the previous 2 years. Now, there will be some tax deductions that can be added back into your “qualifying income”, so that might help.

      When we look at portfolio lending (lenders that write and service their own loans), you can find flexibility with credit scores, but this risk is typically offset by providing a large down payment and having reserves.

      As far as the tax liens go, Fannie Mae announced in July 2017 that it would stop importing tax liens on credit reports used for making credit decisions. I personally have not tested this scenario where we’ve overcome a tax lien, but it sounds like it might be able to be overcome. Here’s the Fannie Mae announcement on that – https://www.fanniemae.com/content/announcement/ll1702.pdf

      The next thing I wanted to address is the flipping opportunities. There are portfolio lenders that will lend money for investment properties that will overlook most of the challenges you’ve presented here as long as you have a large down payment. These are temporary loans for the purposes of fixing and flipping homes.

      I apologize that this is not as detailed of an answer as what you provided in laying out your situation. I guess the one thing I want to leave you with is that anything is possible. Time overcomes most challenges, and so “timing” becomes the most important piece of putting all of the pieces of this puzzle together.

      Having a professional, experienced loan officer on your team is the first step. Patience is the next step. Anything is possible.

      There is no question that there’s a solution here. I’m just not sure of how the timing for that solution may play out.

      Congratulations for doing such a great job recovering from what life threw at you. I am confident that this will end well.

      Hope this helps?

  • Sally Litvin says:

    I just found the answer. I need to wait and get my 15%down
    This is a great forum!!!

    • Hi Sally!

      I’m glad you found the answer. That 15% is common, you may be able to find a loan with as little as 10% down depending on the circumstances for needing a portfolio loan.

      If you’re 100% that you need a portfolio loan, I can introduce you to someone that has experience with those programs. If you’re not 100% sure what you qualify for, I’m happy to give you my .02 if you want to email me the details. My email is scott@findmywayhome.com.

      Hope this helps?

  • Sally Litvin says:

    Hi Scott,
    Is it possible to get a portfolio loan with 10% down?

  • Leslie Flor says:

    Hi Scott,
    My husband and I are recovering from a divorce. We would like to purchase new house but do not qualify for a Traditional mortgage due to low credit score. My husband makes $200k, we have 25%down payment and cosigner. Do you think we could qualify for a portfolio loan? Any insite would be appreciated.

    • Hi Leslie,

      It sounds like a portfolio product may offer some options. The first thing I would do though, is address why the credit scores might be so low.

      I have an expert network of lender friends that have experience with these guidelines. If you would like an introduction, send my your best contact information and State you’re buying in to scott@findmywayhome.com

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