Portfolio Loans for Real Estate Investors

A portfolio loan is a mortgage the lender keeps on its own books instead of selling it to Fannie Mae or Freddie Mac. Because the lender, usually a community bank, regional bank, or credit union, keeps the risk of default itself, it writes its own rules on credit, down payment, property type, and how many properties you can own. The trade-off is that it also sets the structure, and it can write the loan with a rate or term fixed for only 5 to 10 years, after which the rate resets or the remaining balance comes due.

Investors turn to a portfolio loan when a property or borrower does not fit the rules for conventional loans or DSCR loans (loans approved on the property's rent instead of your income). For how the main loan types compare, see tips for getting approved for an investment property mortgage.

Which rules a portfolio lender does not have to follow

A lender that sells a loan to Fannie Mae must follow Fannie Mae's Selling Guide. Three of its rules matter most to investors:

• Individuals only. Fannie Mae buys loans made to people (plus certain trusts), not to an LLC or partnership.
• 10 financed properties. A borrower buying an investment property can have no more than 10 financed 1 to 4 unit properties, counting their own home. Only properties whose mortgages you are personally obligated on count, so a property financed in an LLC's name without your personal liability is left out.
• No prepayment penalties. Fannie Mae will not buy a loan that has one.

A portfolio lender can lend to your LLC, finance your 15th rental, or approve a property that needs repairs, if its own credit policy allows it. It can also add terms Fannie Mae would not accept, such as a prepayment penalty (where federal and state law allow it) or a rule that the property's income must stay above a set level. Federal credit unions are one exception on penalties: federal law lets their borrowers repay early without one.

Federal Truth in Lending rules classify a loan to buy or fix up a rental you will not live in as business credit, so consumer protections such as the Loan Estimate do not apply to most portfolio loans on rentals. Ask the bank for a written term sheet before you apply.

Who offers portfolio loans

• Community and regional banks. Ask for the commercial or business lending department, not the home mortgage desk, and say you want an investor loan on 1 to 4 unit rentals.
• Credit unions. You must qualify for membership, which the credit union defines through its field of membership, such as an employer, a location, or a group you belong to.

A bank's size caps how much it can lend you. Federal law limits a national bank's loans to one borrower to 15% of its capital and surplus, so a bank with $40 million of capital can lend one customer about $6 million in total. As your holdings grow, you may need a second bank.

How portfolio loans are usually structured

A bank decides how long it wants its money tied up at a fixed rate. Ask about each of these terms:

The federal bank examiners' handbook for commercial real estate uses a 5-year term with payments based on a 20-year schedule as its example of this structure, and treats 15 to 30 years as a reasonable amortization range for income-producing property.

Balloon example: you borrow $300,000 at an assumed 7.5% with payments based on 25 years. The payment is $2,217 a month. After 5 years you still owe about $275,198, which you must refinance, renew with the bank, or pay off. If the bank renews over 20 years at 9%, the payment rises to about $2,476. If the property's value has fallen or the bank has cut back on real estate lending, renewal is not guaranteed; the examiners' handbook says borrowers can have trouble refinancing a balloon when property values decline. Interest-only loans for investment properties explains how an interest-only period changes this math.

How a bank weighs you and your other properties

A DSCR lender looks mainly at one property's rent. A bank looks at your whole financial picture. Examiner guidance tells banks to analyze global cash flow, meaning the income and required payments from all your properties, businesses, and personal debts together, including income passed through LLCs and partnerships. Banks also check your liquid assets, other debts and guarantees you have signed, how much of your own cash is in the deal, and your track record with similar properties.

Bring a package to the first meeting:

1. A personal financial statement listing assets and debts.
2. A schedule of real estate owned, with each property's value, loan balance, monthly payment, and rent.
3. Two years of personal and business tax returns, including any K-1s.
4. Current leases or a rent roll for each rental.

Ask whether the rate depends on keeping deposit accounts at the bank, and whether the bank will look at the next deal faster once you have a loan there.

When a portfolio loan beats conventional or DSCR financing

A portfolio loan tends to win when:

• The property falls outside published guidelines. Examples include a building that needs repairs before it can pass a standard appraisal, or a house on more land than a DSCR lender accepts (Arch caps it at 5 acres).
• You have passed 10 financed properties and want one lender that knows your holdings, or you want several properties under one loan; see blanket mortgages.
• Your finances are strong but hard to fit in a formula, such as large assets with uneven income, which a banker can weigh through a global cash flow review.

It tends to lose when you want a rate fixed for 30 years with no renewal risk; a conventional loan, covered in conventional loans for investment properties, or a fixed-rate DSCR loan gives you that. Buildings with 5 or more units are financed as commercial real estate loans, which banks underwrite on net operating income.