When you take out a new loan, it’s always wise to know what type of lender you’re working with, especially if you aim to be in the investment and real estate business for years to come. In Miami and similar real estate markets, mortgages and similar loans are offered by portfolio lenders in Florida.
Let’s break down portfolio lenders, what they do, and how they are advantageous financing resources for many investors.
What Is a Portfolio Lender?
Put simply, a portfolio lender is a bank, credit union, or any other financial institution that originates mortgage loans, then keeps the debt from the mortgage loans in a portfolio. This is contrasted with other lender behavior; in some cases, mortgage lenders sell the loans that they underwrite on the secondary market to government sponsored enterprises like Fannie Mae and Freddie Mac.
Portfolio lenders keep the loans on their balance sheet, meaning they retain all the risk. However, they also retain the potential to make all the profits if they underwrite loans strategically and their borrowers pay back their debts on time.
Since a portfolio lender keeps the loans they originate on their books, this gives them the option to set their own lending standards, or they can simply adopt conforming loan standards. Conforming loans are specific types of mortgages that meet certain requirements and criteria levied by Fannie Mae and Freddie Mac.
Portfolio Lenders in Florida
Portfolio lenders in Florida can take many forms, including banks, credit unions, bridge lenders, hard money lenders, and private institutions with enough money to offer financing to real estate investors.
Given the high prices involved in Florida’s real estate market, portfolio loans are popular options for many would-be homebuyers or rental investors seeking funding for investment properties, as well as homeowners looking to refinance their properties.
What Are Conforming Loan Standards?
In a nutshell, conforming loans are mortgages that meet certain dollar limits set by the Federal Housing Finance Agency, as well as funding criteria set by Fannie Mae and Freddie Mac. In other words, conforming loans are trustworthy, relatively low risk, and backed by major federal institutions.
Conforming loans can’t exceed certain dollar limits. The dollar limit cap varies from year to year; for example, 2022’s limit is $647,200 for the majority of the US.
Conforming loans are popular among lenders and borrowers alike. Lenders like conforming loans because they can be sold in the secondary mortgage market (though portfolio lenders do not do this). Borrowers like conforming loans because they have lower interest rates and lower down payment requirements compared to many other mortgage types.
Fannie Mae and Freddie Mac
Fannie Mae, or the Federal National Mortgage Association, and Freddie Mac, or the Federal Home Loan Mortgage Corporation, are very important, government-sponsored entities that give out and help drive financial activity in the housing loan market. They make guidelines and standardized rules that mortgages for single-family homes have to abide by if they want financial backing from the federal government.
Fannie Mae and Freddie Mac don’t issue mortgage loans, however. They serve as insurers for mortgages that are underwritten by other lending institutions like banks and credit unions.
Benefits of Portfolio Lenders
Portfolio lenders offer several important benefits to borrowers that may make them attractive options for your upcoming investment needs or for your homebuying goals.
For starters, portfolio lenders provide greater flexibility in their loan terms. The loans offered by portfolio lenders are not required to conform to standards that make them sellable on the secondary market. Therefore, portfolio lenders are much freer to be flexible with things like loan amounts, down payment requirements, and repayment terms.
In this way, you may find portfolio lenders willing to underwrite a loan for you even if you have less-than-stellar credit or if you are trying to get approved for a jumbo loan amount that falls above conforming loan limits.
Portfolio lenders offer borrowers greater servicer certainty. Because portfolio lenders own and service the loans that they originate/underwrite, you don’t have to worry about the lender selling your loan to a new servicer.
Not only can this result in extra paperwork, but it may also result in some confusion, financial headaches, etc. The loans offered by portfolio lenders are sometimes much simpler to deal with and keep track of.
Above all else, portfolio lenders provide a simpler underwriting process for borrowers like you. Again, portfolio lenders are not beholden to the same requirements for conventional mortgages, as those mortgages aren’t meant to be bundled and sold on the secondary market.
Thanks to this fact, you can qualify for a mortgage loan from a portfolio lender with a simple, streamlined underwriting process with a minimum of hassle. In some cases, portfolio loans are the best option for you if you need funding fast to secure a deal or buy a property quickly before someone else scoops it up.
Drawbacks of Portfolio Lenders
While portfolio lenders can be great choices, you should also keep in mind that there are two primary drawbacks to working with them.
Firstly, portfolio lenders often levy higher costs on borrowers. Since portfolio lenders hold their loans and accept extra risk, they may charge higher interest rates or higher fees for their services. This is only fair, as they don't push off the risk for underwriting less-than-stellar loans onto the secondary market or through packaging loans into special securities.
So, while loans from portfolio lenders can be more affordable and ideal, they also may not be, depending on which lender you contact and your personal financial attributes (such as credit score, history of investment success, etc.).
Secondly, portfolio lenders can and do often charge prepayment penalties. Prepayment penalties are fees that you are forced to pay if you try to pay off your loan ahead of schedule (in order to save money by reducing the interest payments you make).
Portfolio lenders primarily make money on the interest they charge every month. Therefore, if you try to pay off your loan early, they will recoup that loss by charging you extra fees written into your loan contract.
However, not all portfolio lenders have a prepayment penalty and a reputable lender will be able to let you know upfront if there are any fees associated with an early pay off.
Finding a Portfolio Lender in Florida
You will have more success finding a reliable portfolio lender in Florida if you focus on finding a lender who specializes in the Florida market. At Vaster, our team has decades of experience in Florida real estate sales, development, and financing. Our goal is to make sure our clients stay competitive in Florida’s fast-moving real estate market, by providing reliable access to financing that can get you to the closing table in less than a week.
As you can see, portfolio lenders have several important advantages that make them excellent financing contacts for your real estate investment goals. While there are a few downsides, the right portfolio lenders could help you achieve your ambitions and bolster your investment portfolio faster than other financiers.