In the real estate market, there are two main categories of mortgages that prospective property buyers will encounter: “traditional” mortgage loans and portfolio mortgage loans.
Traditional mortgage lenders typically only originate mortgages and then quickly sell them off in the secondary mortgage market. What this means is that large private companies like Residential Funding or quasi-federal institutions like Fannie Mae and Freddie Mac buy up huge quantities of mortgages from numerous private banks. These “secondary buyers” then use these mortgages to back up investment securities that can be traded in much the same manner as stocks and bonds. The mortgage originators agree to sell because they wish to gain immediate profit from origination fees but avoid the risks of holding on to the mortgages for the long-term.
Portfolio lenders, on the other hand, both originate mortgages and service them. They seek to make their profits from both the origination fees and the interest accrued during the life of the loan. Below, we will look at 10 of the most important facts concerning portfolio loans that anyone considering taking out such a loan ought to be aware of.
Portfolio loans are frequently, though not exclusively, sought out by those interested in acquiring investment real estate. When buying rental properties, condos, repossessed homes, or houses badly in need of renovation before being resold, it is important to work with a mortgage lender who understands the needs of real estate investors. Portfolio lenders typically have the advantage in that arena.
Sometimes, prospective home buyers are blocked out of a traditional mortgage due to the strict borrowing guidelines that secondary mortgage buyers impose. When the mortgage originator plans to sell on the secondary market, they cannot do otherwise but limit their underwriting guidelines to those approved by secondary buyers. This leaves many would-be home buyers out in the cold. However, portfolio lenders will sometimes extend loans to lower-income buyers or those whose credit rating suffered from a past period of unemployment. Portfolio lenders cannot approve everyone, but they do tend to go beyond the limits of traditional mortgage lenders.
Portfolio loans are safer for borrowers in that the borrower will be dealing with the same lender throughout the life of the loan. If, for example, a borrower’s income is reduced or he is unemployed for a time, he has a much better chance of avoiding foreclosure when working with a lender who has known him for many years as opposed to a complete stranger.
There is typically greater flexibility in establishing terms for a portfolio loan than with those to be sold on the secondary market. This is, in large part, due to the fact that most portfolio lenders are small, privately owned community banks that simply have more room for discretion when giving out a loan.
Borrowers have the right to know ahead of time if their lender plans to sell the mortgage. Federal law requires that, within three days of taking an application, a mortgage lender disclose to the applicant a three-year history of its mortgage selling or holding practices as well as its intentions as to the mortgage in question.
Good credit is still important in obtaining a portfolio loan. The risk is lowered when borrowers have a good credit score, and every mortgage lender will take that into account regardless of the exact type of mortgage involved. While in many cases, a lower credit rating may be acceptable, in some cases, it is actually more difficult to obtain a portfolio loan.
During periods of economic slowdown, there is a tendency of banks to curtail their issuance of portfolio loans. This is due to the upswing in default rates during these tough economic times.
Contrary to the belief of some, there is nothing inferior or particularly risky about portfolio loans. It is simply a matter of not following the underwriting guidelines of banks controlled by the secondary market rather than of engaging in reckless lending.
Portfolio loans usually do not require borrowers to purchase private mortgage insurance policies. This has a cost-savings effect since such insurance can be rather expensive.
In many cases, portfolio lenders allow the use of stocks as collateral for the loan. There will be specific criteria, however, that these stocks must meet. Typically, they must be liquid, and the borrower must put them up at no more than 90% of their face value. There may also be time constraints on such deals since stocks are so easily affected by market movements.
There are many reputable companies that deal in portfolio loans, and these types of mortgages are often preferred by real estate investors, those who have trouble getting a traditional loan, and by those who like the flexibility or security that such loans provide. Some portfolio loan providers, such as the Houston-based group Capital Concepts, accept online applications and offer free online consultations to facilitate speedy investment maneuvering. The need to buy and sell properties in a relatively quick manner is part and parcel of many investment property strategies, and without this kind of agility, many opportunities could be lost.
Anyone considering taking out a mortgage should examine all of their options, including that of a portfolio loan. While not for everyone, these kinds of mortgages have many advantages and benefits.