Let’s start with an explanation. A portfolio loan is a loan that doesn’t meet the underwriting criteria of conventional types of loans.
In addition, conventional loan approvals are usually required to go via an automated underwriting process.
Conventional loan programs feature simple and available qualification requirements that are reasonably similar across those programs. Of course, there are minor changes, but traditional financing options generally follow the same fundamental guidelines.
The term ‘portfolio’ suggests that the loan is placed in a private investor’s portfolio. Since a portfolio loan is handled by a private investor, it is checked and approved by an underwriter rather than automatic software.
A portfolio loan, unlike a hard money loan, generally requires some proof of creditworthiness. It means that the lender will surely go through your income, credit scores, work history and continuity, and, in certain cases, savings.
Why should you consider a Portfolio Loan?
The word “portfolio” itself is a high-level term. It refers to a customized lending solution to a specific set of conditions that may exclude you from using a regular loan.
Here are some of the most common reasons for using a portfolio loan:
- Purchasing investment property or number of properties at once
- No income, high net worth, or asset depletion loan
- High debt-to-income ratios
- Latest financial difficulty – foreclosure, short sale, or deed in lieu
- Declared bankruptcy
- Bridging the gap between waiting periods – income seasoning / awaiting source of income
- Income from self-employment based on bank statements
In many cases, the interest rate is secondary to the acquisition of the asset. So before taking a portfolio loan, we would recommend you have an exit strategy in place. What does it mean? Always have a plan for refinancing or selling the property to get out of this debt.
Interest Rates on Portfolio Loans
Interest rates on portfolio loans can differ significantly and are nearly usually higher than rates on regular conventional or government-insured loans.
Since these loans are serviced by private lenders, higher interest rates and closing expenses explain the motivation to give money under more risky conditions than a conventional loan.
The interest rate for a portfolio loan will typically vary from 5% to 9%. If you find significantly higher rates, you may be checking a hard money loan program that requires almost no proof or verification.
Closing Costs for Portfolio Loans
If you’re using a conventional loan – almost always, you have the option to “roll in” closing costs into your interest rate. The loan officer or lender you interact with is compensated by the lender as well.
But if you will go for a portfolio loan – you should pay origination fees or points, and there’s no way to avoid it.
Are there advantages of High-Cost Loans?
This is when the “glass half full” cliché comes into play. However, when talking about a non-conventional loan, it usually boils down to simple arithmetic.
As we previously stated, you should not go for a portfolio loan unless you have a clear exit plan in mind. The majority of portfolio loans are hybrid ARM (adjustable-rate mortgage) loans with a short duration.
A hybrid loan has a fixed rate for the first 5 to 7 years and then becomes adjustable. So, always consider your portfolio loan to be a short-term solution that may be resolved over time.
The cost of a portfolio loan is an investment that will provide a profit in the future. Therefore, it would be best to have an end goal, whether it is the comfort of owning a house, building equity, or transforming wasteful rent into income mortgage interest.
Talk to your CPA or account representative about the tax advantages of ownership. Given that mortgage interest is often tax-deductible, it stands to reason that a higher interest rate converts into a greater tax deduction, right?
Those points you’re paying, as well as the increased closing expenses, may contribute to your tax savings at the end of the year.
