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.

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.

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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.

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.

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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.

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.

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Portfolio loans are also great options for investors that need "out of the box" financing options.

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

A 20 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

  • Caitlin says:

    Hi Scott,

    I’m looking at purchasing a second home as a vacation home. I was told by one lender today that the condo I’m interested in is “non warrantable” and therefore not eligible for conventional loans. I suspect the reason for this is the high percentage of rentals in the building. Only the top floor is owner occupancy only (where the unit I’m interested in is). The real estate agent suggested a portfolio loan, and I was told that 4.25-4.75% interest is available for a 5, 10, or 15 year fixed period, after which the interest rate will be variable. The purchase price is around 600k, and I have more than 200k in cash savings. My income is also stable and significant, so I’m sure I’ll be able to pay off the loan completely within 5 years. Is this a terrible idea? Also, is mortgage interest on portfolio loans tax deductible? I’m in the highest tax bracket, so that is potentially a big deal to me.

    Thanks for your advice! I found the blog very helpful.

    • Scott Schang says:

      Hi Caitlin,

      Those terms on the portfolio loan are pretty good, and yes, I think it’s a great idea. Especially if you can have the loan paid off in 5 years before it adjusts.

      As far as tax-deductibility, you should consult your CPA or financial planner for that kind of advice. You are going to have the option of buying it as a second home, or as an investment property. There may be occupancy requirements before being able to write off the interest as a tax deduction. That’s a tax question, not an underwriting question.

      If you plan on staying in the home part-time and renting it out the rest of the time, it is likely you will take a loss on that investment property, resulting in a tax deduction.

      Again, I am not a licensed CPA and I’m not giving tax advice…I’m just saying look into it 🙂

      I hope this helps?

  • Ashley says:

    Hey Scott,

    Newbie investor here.
    We’re currently renting (by choice) because I have to move for my job very often.
    We want to buy and hold rentals using the Brrrr method.
    Also open to fix and flips short term to continue to build capital.
    I have a credit score of 802 and about $40k in cash we’re ready to use.
    I understand conventional loans are limited to up to 10 properties under federal guidelines and portfolio lenders don’t have these types of limits.
    Say we use a portfolio lender for a bunch of our properties over the next few years which would allow us to buy more than 10.
    And eventually want to buy our OWN dream home with a loan.
    Since we would be the owners of many rental properties…would our debt to income ratio affect our possibility of buying our own home?
    With conventional loans I know they look at that but I’m not as familiar with portfolio lenders.

    Thanks!!

    • Scott Schang says:

      Hi Ashley, first of all, congratulations on your exciting investing journey! You’re correct, Fannie Mae will limit the number of financed investment properties to 10, not including your primary residence.

      When it comes to portfolio lenders, while they do allow flexibilities on some things, they also tend to require higher interest rates, bigger down payment and are not typically 30-year mortgages.

      If you’re just getting started, I would recommend crossing that bridge when you get to it. If you max out your rental property loans with Fannie, you can look into a portfolio lender and do a blanket loan for a group of your properties, freeing up your Fannie limit, or you can start to pay off those first properties so they are free and clear, freeing up your Fannie limit.

      Now, when it comes to qualifying for a loan for yourself. The number of Fannie loans you have does not matter when using that loan for your primary residence.

      Your debt to income calculation will include your schedule E on your tax returns, which will determine any income or losses you realized from your rental properties.

      You will be unable to use the income from your rental parties for the purposes of qualifying for your primary residence until you have a 2-year history as a landlord. This is documented with 2 years tax returns showing a schedule E.

      My advice is to also find a rock star lender that can work with you on these purchases. I have friends all over the country that you can talk to. A good lender is always going to know what your numbers are and can tell you what options you have and when.

      The last thing I would say about portfolio lenders is that their guidelines may vary. Sometimes they use Fannie Mae guidelines and allow exceptions that Fannie will not, and sometimes they have their own terms and guidelines.

      Building relationships with a loan officer that has access to multiple investors is really important. This is typically a mortgage broker.

      If you would like an introduction to a loan officer that I know and trust, just shoot me an email to scott@findmywayhome.com and I can make that connection.

      I hope this helps?

  • Brenda says:

    Hi Scott,
    My husband and I have sold our house in MN. Our closing is on 24Jun. We are moving to AZ and have a signed purchase agreement on a house there. Shortly after we signed the AZ purchase agreement, we were both furloughed due to Covid 19. Hubby is a school bus driver and I am a corporate travel agent. I was told I would go back to work 01Sep. AZ owners agreed to wait for us and we all signed an addendum to the original agreement to close at the end of October.
    I’m not sure I want to wait until Oct to close. We both have credit scores over 800. We have enough money in savings to pay the mortgage for over a year. We would rather put 10% or less down at closing. Do you think a portfolio loan would be an option for us?

    • Scott Schang says:

      Hi Brenda, I’m so sorry to hear about your situation. One of the challenges that have come from this crisis is that non-lending is really crazy right now. Most portfolio loans have been suspended and are no longer available through non-bank lenders.

      I would recommend you go to a local bank or credit union in the town you are moving to and talk to the loan manager there. With a down payment and your credit scores, that will go a long way toward compensating factors if you’re unable to show income until after September.

      And that’s really where your biggest challenge will come in. You are going to have to document that you will be receiving a paycheck before your first payment is due. You may be able to document this with a letter from your employer.

      Definitely talk to local banks. That’s your best option.

      Hope this helps?