Portfolio Loan vs Conventional Loan for Buyers
Portfolio Loan vs Conventional Loan for Buyers
Keep hearing terms like “conventional lender” and “portfolio lender” thrown around by other real estate investors, but not sure what they mean?
There are near-endless types of financing available, which is great news — it means experienced investors have plenty of options to fund great deals. But the abundance of options also gets overwhelming for new investors.
Many new rental investors start with two basic types of financing: conventional loans and portfolio loans. Both have pros, cons, and quirks you should understand before signing on the dotted line.
Portfolio Loans vs. Conventional Loans
As you start building out your “financing toolkit” of options, start with two of the most fundamental for rental properties: conventional loans and portfolio loans.
Conventional Loans
If you’ve ever taken out a mortgage to buy a home to move into, you’ve probably borrowed a conventional loan.
The terms “conventional loan” or “conventional mortgage” refer to traditional bank mortgages that fit into either agency-backed (Fannie Mae or Freddie Mac) or government-backed (FHA, VA, or USDA) loan programs. Don’t confuse these terms with the similar-yet-distinct term “conforming loan,” which specifically refers to mortgages that conform to Fannie Mae or Freddie Mac loan programs.
Conventional loans are usually the cheapest form of financing on offer. Because they conform to standardized loan programs, lenders can buy and sell them on the open market. And they usually do — expect to get a letter within a month or two of closing these loans, stating that your loan has been transferred to Wells Fargo or Chase or some other massive loan servicing company.
Many novice real estate investors start with conventional loans for rental properties, because this type of loan is all they know. Conventional loans come with several major downsides however, and most rental investors quickly outgrow them.
First, conventional lenders are slow. Most can barely close within 30 days. If you compete with cash buyers offering to close within a week, that puts you at a stark disadvantage.
Second, conventional loans report on your credit. That may not sound like a problem at first, but these programs put a cap on how many mortgages can appear on your credit report.
That puts a limit on how many rental properties you can finance with conventional mortgage loans. Many programs cap this number at four, and some go as high as ten.
Portfolio Loans
Portfolio lenders keep their loans within their own “portfolios,” rather than selling them off to huge loan servicing companies like Wells Fargo. You can think of them as lending their own money (although in reality most borrow the money from outside investors).
Why does that matter?
First, they come up with their own lending guidelines, rather than having to conform to government-dictated loan programs. That makes them far more flexible, and able to work with borrowers on unusual real estate deals.
Most are also smaller, more nimble lending companies. They can typically close within 10-21 days.
Speed and flexibility come at a cost, however. Expect to pay a little more for portfolio loans versus conventional loans, both in interest rates and points. Many portfolio lenders offer preferential pricing to borrowers who they’ve worked with before, so it pays to develop a relationship.
While a few homeowners reluctantly take out portfolio loans for jumbo mortgages or non-warrantable condo loans, portfolio lenders usually work with investors. They issue rental property loans, commercial loans for apartment buildings and commercial-use buildings, and sometimes land loans.
How Do Portfolio Loans Differ from Hard Money Loans?
Portfolio loans are generally long-term mortgage-style loans. For example, you might take out a 30-year fixed-interest mortgage from a portfolio lender to buy or refinance a rental property.
Hard money loans are short-term loans. In most cases, hard money lenders issue purchase-rehab loans, designed for house flippers or BRRRR investors to buy a fixer-upper, renovate it, and either sell or refinance it.
They typically don’t charge prepayment penalties, and expect you to pay them off in full within 6-18 months. Many don’t amortize the loans, and simply charge interest only.
Some hard money lenders also provide new construction loans, which work similarly.
Note that many portfolio lenders offer both long-term portfolio loans and short-term hard money loans. You can often refinance a hard money loan into a portfolio loan with the same lender.
Portfolio Lenders vs. Private Lenders
When real estate investors speak of private lenders, they typically refer to people who don’t lend money as a business.
For example, if you borrow $20,000 from your sister to help with a down payment on flip, you borrowed private money. Your sister filled the role of private money lender — even though she’s not in the business of lending money. As you build a track record of success, you can may find private money from your friends, family, and acquaintances to be the cheapest, most flexible funding available.
Portfolio lenders make a business of lending money, and charge accordingly.
Other Creative Financing Strategies
Friends and family aren’t the only potential source of private money. You could also negotiate owner financing with the seller, which also falls under the umbrella of private money.
As variations on seller financing, you can also explore subject-to financing, installment contracts, and lease-purchase agreements.
Alternatively, you can open unsecured business credit lines and cards from credit concierge services like Fund&Grow. Real estate investors can flexibly draw on these lines of credit as needed for down payments, repairs, renovations, direct mail campaigns, and so forth.
As you gain experience, aim to build out your own financing toolkit of options. Build relationships with several hard money lenders, portfolio lenders, and conventional lenders to always have a backup lender on call.
Expert real estate investors know that there’s always funding available for great deals. The constraints are your ability to find those deals, your cash available, and your own creativity.