How No Waiting Period Portfolio Loans Work
Portfolio loans give homebuyers options for buying a home after a financial hardship with little to no waiting period.
These programs allow no waiting period from the completion financial event if it is a chapter 7 bankruptcy, foreclosure, deed in lieu of foreclosure, or short sale. The filing of a chapter 13 bankruptcy counts as completion with a no waiting period portfolio loan.
Portfolio loans do not necessarily require that you have bad credit. These are not sub-prime mortgages. A good example of needing to use a portfolio loan would be if you do not yet meet the waiting period after a bankruptcy.
The most common of these examples is when there is a recent short sale, deed in lieu or foreclosure on a mortgage that was included and discharged in the bankruptcy.
Using a Conventional loan, you can ignore the foreclosure, short sale, or deed in lieu date, if you meet the waiting period of 4 years from the bankruptcy discharge on a chapter 7, or 2 years from the discharge of a chapter 13.
FHA guidelines require a 3 year waiting period from a foreclosure, short sale or deed in lieu, even if the mortgage was discharged in a bankruptcy.
Portfolio loans are offered by lenders that are willing to lend money on a temporary basis to folks that do not quite fall within the guidelines of traditional financing options offered by Fannie Mae, Freddie Mac, FHA, VA or USDA.
Common Myths About Higher Fees
Because portfolio loans provide home financing options that traditional guidelines do not allow, these loans are considered higher risk loans.
Common features of higher risk loans include a higher down payment, higher interest rates, higher closing costs, and short term financing options.
When I use the term word “higher” regarding down payment, costs and rates, that does not mean that you are getting ripped off or being taken advantage of. These are not the kinds of loans where some buy comes and breaks your knee caps if you miss a payment.
There is a very good reason for the higher rates and fees, and it makes sense once you know the truth.
Yes, the rates and down payment requirements are higher if use a no waiting period portfolio loan, but the fees are actually very similar to using traditional financing to buy your home.
The biggest difference is now your lender is paid. With traditional financing programs, the bank pays the loan officer or broker that processes your loan. These costs are included in your interest rate and you will never notice them.
This is similar to how gas prices work. If you have ever noticed the sticker on a gas pump that explains the taxes and fees that are added to the cost of a gallon of gas, you might be surprised to find out that you’re paying significantly more than just the cost of the gas itself.
Mortgage loans work a lot like this. There is a base interest rate, then there are taxes and fees added to that, which results in the final “cost” of your loan, either by way of interest rate, or fees charged by the lender.
Lenders do not make more money by offering you a portfolio loan. Portfolio lenders typically do not include the loan officer or broker compensation in the cost of the interest rate.
Some lenders will allow you to include those fees in your interest rate, but it is almost always a better option to pay the closing costs and not include them in your payment. Do the math, let the numbers tell you which option makes the most sense.
Down Payment Requirements
Compared to the minimum down payment requirement available with traditional financing programs, no waiting period portfolio loans do require a larger down payment.
If you are using a portfolio loan, you are not going to be able to qualify for a 3% to 5% down payment like you can get with a Conventional or FHA loan.
If you have a low credit score and no reserves, the down payment required is going to be higher than if you have better credit and money saved up. Here is chart of how this would work with a no waiting period portfolio loan.
|Credit Score||Down Payment||Reserves|
Flexible Qualifying Guidelines
No waiting period portfolio loans also offer flexible qualifying guidelines that make it easier to get into a home than using a traditional home loan. Here are a few of the most flexible features:
- 1 Day from foreclosure, short sale, dil, chapter 7, or filing of chapter 13
- 100% gift funds can be used for down payment
- 50% debt to income allowed
- 55% debt to income allowed with compensating factors
- $1,000,000 maximum loan amount
- Unlimited financed properties allowed
- 1 to 4 units allowed (owner occupied)
- Up to 6% seller concessions allowed
Portfolio Loan Interest Rates
The interest rates on a no waiting period portfolio loan is determined much the same way as traditional mortgage rates are calculated.
The starting rates for a portfolio loan with no waiting period after a financial hardship can be as low as in the 6% range (as of April 2017), or as high as the high 8% range.
Factors that are included in the calculation of your final rate includes your down payment, your credit score, and your loan amount.
In some cases, it may be possible to pay discount points to reduce your interest rate, but I do not recommend it unless it is required to qualify for the loan.
Because these loans are only a temporary solution to a short term problem, you do not want invest more money into this solution than you have to.
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.