A portfolio loan is a loan that a lender issues and does not resell in the secondary market. It is called a portfolio loan because it becomes part of the lender’s “portfolio” of loans. In some cases, a portfolio loan can also mean a loan issued against a portfolio of properties, though this is comparatively rare.
What Is a Portfolio Loan?
A portfolio loan is a type of loan that a lender issues and then keeps on its books rather than selling it. Portfolio loans are often very different from conventional loans, with different rates, terms, and qualification requirements. These loans can vary drastically from one lender to another, based on each lender’s risk appetite and target loan type.
In most cases, portfolio loans may have lower qualification requirements than conventional loans, as lenders may be willing to consider borrower income that can’t be used to qualify for conventional financing. However, these loans may have tighter terms, such as lower loan-to-value limits or shorter terms. Higher interest rates are also common.
What Is a Portfolio Lender?
A portfolio lender offers loans to borrowers and then retains those loans on their own books rather than selling them to another company or investor. Portfolio lenders can be either private individuals or institutions, including investment firms, hedge funds, and private equity firms. These lenders often have more flexible lending criteria than banks or other traditional lenders, making it easier to qualify for a loan.
How Do Portfolio Loans Work?
For borrowers, portfolio loans function very similarly to conventional loans. There is an application process, underwriting, negotiation of terms, and a closing. The biggest difference comes after the loan is issued, as payments will always be made directly to the lender who made the loan—rather than another lender, investor, or loan administrator.
Additionally, portfolio loans may have some small differences in applying for a loan. This can include additional steps required in underwriting, for example, that could differ from a conventional loan application process.
Portfolio Loan Rates
Portfolio loan rates can vary depending on the lender and the type of loan you’re applying for. However, portfolio loans typically have higher interest rates than traditional mortgages. This is because lenders see portfolio loans as riskier, as they’re often used to finance properties that don’t fit traditional lending criteria.
For this reason, conventional loans are often preferable to investors who do not need additional underwriting flexibility to qualify.
Portfolio Loan Fees
In addition to interest, you may also have to pay fees on your portfolio loan. These fees can include origination fees, points, and closing costs. While these loans are typical for all loans, they may be slightly higher for portfolio loans.
Portfolio Loans vs. Conventional Loans
Portfolio loans and conventional loans are both types of financing that investors can use to purchase commercial real estate. However, there are some key differences between the two.
Conventional loans are more common than portfolio loans and are typically preferable for borrowers who meet traditional lending criteria. These loans usually have lower interest rates than portfolio loans and don’t require you to pay as many fees.
Additionally, portfolio loans are sometimes used by investors who want to finance the purchase, development, or renovation of multiple properties. They’re also used by those who want to buy a property that doesn’t fit traditional lending criteria.
In certain cases, portfolio loans may be structured so that investors can change the properties being used to secure the loan, so long as the aggregate value of the collateralized properties meets or exceeds a certain value.
Portfolio Loan Pros and Cons
Portfolio loans can be a great way to finance your property portfolio, but there are some pros and cons to consider before you apply for one.
Pros
- Lenders offering portfolio loans can usually be more flexible in underwriting.
- Investors can use them to buy a property that doesn’t fit traditional lending criteria.
- Portfolio lenders may consider forms of income that can’t be used to qualify for conventional financing.
- Loan terms may be more negotiable than traditional financing.
- Portfolio loans can sometimes be used to finance the purchase of multiple properties.
Cons
- Portfolio loans usually have higher interest rates than traditional mortgages.
- Portfolio loans may have shorter terms than conventional mortgages, with large balloon payments due at the end of the loan term.
- Fees may be higher for conventional loans, including origination fees, points, and closing costs.
- Loans may have early prepayment penalties.
Portfolio Loan Lenders
If you’re interested in taking out a portfolio loan, there are a few things to consider before choosing a lender. First, make sure to compare interest rates and fees from multiple lenders. You should also ask each lender about their experience with portfolio loans and whether they have any specific programs for investors.
While some portfolio lenders are large national institutions, there are also several regional portfolio lenders or even local lending groups that issue portfolio loans in certain circumstances. If you want to find a portfolio lender, the best way to do so is by using a loan broker or marketplace that can match you with a portfolio lender that’s right for you.
Frequently Asked Questions
How much money down do you need for a portfolio loan?
The amount of money needed for a down payment on a portfolio loan varies based on the lender you choose and the type of loan you’re applying for. However, portfolio loans typically require a higher down payment than traditional mortgages. So, if you’re looking to take out a portfolio loan, be prepared to put down a larger chunk of cash upfront.
How long does it take to get approved for a portfolio loan?
Getting approved for a portfolio loan can take anywhere from 10 to 45 days. However, this ultimately depends on the lender you work with, the amount of money you’re borrowing, and the type of property you’re financing. While some private lenders focus on quick closings, others that charge lower rates or fees can have more involved underwriting processes.
Do portfolio loans have closing costs?
Portfolio loans typically have higher closing costs than traditional mortgages. This is because they are often used by borrowers who don’t qualify for conventional financing, so lenders do not need to be as competitive in pricing their loans.
