Often misunderstood by the majority of today’s buyers, and sometimes flat-out ignored, portfolio lenders have proven that they at least belong in the funding conversation. If for nothing else, portfolio mortgage lenders award prospective buyers something invaluable: another option. Few things, for that matter, have proven more consequential to impending real estate acquisitions than a variety of options. Those buyers awarded the opportunity to shop around for funding are much more likely to find a lender with favorable terms. At the very least, portfolio lenders provide buyers with a competitive means of financing; at their very best, they can be the source of your next purchase.
A portfolio lender functions a lot like a traditional lender, only with one significant caveat: portfolio lenders don’t sell the loans they originate to the secondary market. More specifically, portfolio lenders will originate loans and collect their respective fees; however, instead of selling the mortgage to the secondary market (like traditional lenders do), portfolio lenders will hold on to the original loan.
Aptly named, portfolio lenders actually accumulate a large portfolio of mortgages, each of which is kept to generate fees, or as Investopedia so eloquently puts it, “to make profits from the net interest rate spread (difference) between interest-earning assets and the interest paid on deposits in their mortgage portfolio.” It is worth noting, however, that while holding onto said mortgages constitutes a larger risk for the portfolio lender, there’s also more upside. The fees have the potential to add up to large profits, but there’s always the chance the loan defaults.
Most buyers couldn’t care less about the risk portfolio lenders take on by refusing to sell to the secondary market, which begs the question: What impact does portfolio lending have on borrowers? What do prospective buyers need to learn about portfolio lending banks before signing any contracts? Perhaps even more importantly, what should anyone looking to buy a home learn about portfolio lending real estate loans before moving on to a more traditional option?
To give yourself a better idea of what portfolio lending would mean for you, I recommend taking a look at the pros and cons of portfolio lending. Whether you find out it’s not for you or that it’s a viable option, you’ll be glad you conducted at least a little research.
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Not unlike almost every other form of real estate financing, portfolio mortgage lenders have become synonymous with both pros and cons. How the disadvantages and advantages play out in your corner, however, are entirely dependent on your own situation. To find out if portfolio lending is right for you, weigh the pros and cons, and determine how they will translate in your own purchases.
Easier To Receive Loan Approval: Put simply, it’s easier to receive approval for a portfolio loan because they do not need to conform to the secondary market’s criteria. In other words, since portfolio lenders do not sell their loans to other parties, they do not need to impose additional underwriting language that would otherwise make it more difficult to qualify. Instead, the underwriting for a portfolio loan is subject to a single lender, and not at the mercy of government programs like Fannie Mae or Freddie Mac.
Greater Flexibility Than Traditional Loans: Since portfolio lenders are not beholden to the same secondary market as traditional lenders, they can exercise greater flexibility. Perhaps even more importantly, portfolio lenders can adjust their terms and account for their customers’ unique scenarios. That’s good news for anyone looking for a departure from traditional programs.
Investor Friendly Terms: In addition to the aforementioned flexibility, investors should take solace in the fact that portfolio lenders are often a good choice for real estate entrepreneurs. For starters, portfolio lenders don’t limit the number of homes that can be purchased at a given time. Investors could conceivably buy multiple properties using portfolio loans. In addition, these types of loans don’t require the property to be in any sort of shape. Investors that want to buy fixer-uppers are more than welcome to with a portfolio loan.
Additional Fees: As I already alluded to before, portfolio lenders make a great deal of their money on origination fees and interest; it’s their way I’m making money while offsetting the risk of default. That said, portfolio loans typically coincide with larger fees. Expect to pay more for the loan origination in return for the pros I discussed above.
Higher Interest Rates: Not unlike the previously discussed fees, the limitations of portfolio lenders are apparent in their interest rates. Portfolio lenders tend to charge higher interest rates because of the risk they take on by neglecting to sell to the secondary market. Therefore, borrowers should expect to pay more
For one reason or another, portfolio lenders have taken a back seat to their more traditional counterparts. It is fair to say traditional loans are more sought after, but that’s not to detract from the many benefits portfolio lenders offer. For starters, portfolio lending awards savvy investors a subsequent opportunity to secure funding. Not only that, but the ease and flexibility (at least compared to traditional loans) in which portfolio loans may be had constitutes the primary reason many people should at least consider them.