The Home Buyer's Korner

Information presented should be used for educational purposes only.

January 28th, 2017

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What is a Portfolio Loan?

imagesHere’s the deal… there is no such thing as a cookie cutter scenario when it comes to home financing, whether it’s FHA, Conventional, Jumbo, VA, or USDA, financing… everyone’s situation is different and so are many properties.

Portfolio loans are designed to get folks approved for a home loan when they are not eligible for any the more commonly available types of financing stated above or the property isn’t eligible for traditional financial, such as many condominium projects.

These types of mortgages are commonly funded by small banks or credit unions, and are kept in their “portfolio”. The reason portfolio loans are typically found at local banks or credit unions is simply because these financial institutions are more often than not home-grown than your large lenders.

Small community banks and credit unions have many reasons to help their local economy grow and know that if they give a home buyer a chance that an institutional lender wouldn’t, they will be a loyal client for life. Simply put, small community banks and credit unions are built more around relationships and willing to take risks because institutional lenders don’t.

Getting a portfolio loan is more of a common sense type of approach to mortgage lending, unlike your traditional financing, which are pretty much in-the-box type loan programs, while with a portfolio loan the story matters.

When is a portfolio loan necessary?

Recent Credit Issues – Many times a portfolio loan is called for when a borrower has damaged credit and prevents them from securing an FHA, VA, USDA or Conventional loan.

Bad things happen to good people. Maybe their credit was ruined because of a nasty divorce or due to an injury. Whatever the case, it’s going to have an impact. Sometimes when bad things happen it forces foreclosure or bankruptcy, but most often than not people get on with their lives and what was earth shaking a couple years ago turns out to only be rough patch, but that doesn’t really mean anything to an institutional lender, but portfolio lenders often look and the now and not so much at the past.

With a traditional mortgage, there is waiting periods you have to meet before being able to buy a house and even if you won the PCH $5000 a week for life sweepstakes you’ll have to wait least three years before you can do get a traditional loan if that rough patch created a foreclosure. But should it really be that way if the situation was truly temporary and you’re back on their feet? The answer more often than not is no if you’re working with a Portfolio lender.

If any of the following issues have created a rough patch for you consider a portfolio lender, should you decide it’s time to purchase a home.

  1. Bankruptcy;
  2. Foreclosure;
  3. Short-sale;
  4. Ex-spouse ruined credit during nasty divorce;
  5. Piled up medical bills;
  6. collections;
  7. Tax lien;
  8. Judgment;
  9. Low credit scores due to high credit card balances;
  10. Late payments in last 24 months.

Unique Property Type – Sometimes the property you’re looking to buy is particularly unique. So unique that it does not meet the necessary guidelines to be eligible for traditional financing. It’s most common with condominiums. Because the homeowners association gets a full review by the lender to determine its financial stability, many condos are deemed “non-warrantable”. Issues that make condominiums non-warrantable by institutional lenders can be:

  1. Homeowners association has a lack of reserves;
  2. Inadequate insurance coverage;
  3. Inadequate flood insurance coverage;
  4. Too many units are tenant occupied (renters);
  5. The complex is under construction or in a phase that calls for more construction;
  6. Too many units are owned by 1 person or entity (investor owns high percentage of units);
  7. The remaining terms of the Leasehold don’t meet FNMA or FHA guidelines;
  8. A project that has hotel–like characteristics (condohotel).

Other Property Issues for a Traditional Lender can be:

  1. Commercially zoned property that is being used as residential;
  2. Berm home;
  3. Log cabin (if not typical in the market);
  4. Any type of home that an appraiser has a difficult time finding comparable sale data.

Foreign Nationals – When folks move to the US and want to buy a house right away, they’re commonly faced with one major problems:

  • They don’t have credit established in the United States and they do not have documented income acceptable to a traditional lender.

If this sounds like you it’s a perfect reason to pursue a portfolio loan. There are some main things you want to be prepared to provide if you’re looking for a portfolio loan and new to the United States.

  1. Type of VISA, and all VISA applicable documentation;
  2. Previous 2 year income history in previous country (pay-stubs/tax returns);
  3. Asset statements;
  4. Letter explaining intent to stay in the US;
  5. Proof of income established in United States (employment letter, pay-stub);

Unique Income Circumstances – We often see borrowers that are financially stable, have great credit, solid assets, but don’t qualify for a mortgage due to a simple technicality regarding their income situation. This is another great opportunity to explore the possibility of getting a portfolio loan.

Keep in mind, portfolio loans are not necessarily “stated income” loans, where the borrower tells the lender how much they make, and all is well (like the old days before the housing meltdown). Portfolio loans are still full documentation loans, but are looked at from a common sense standpoint.

For example, let’s look at 1099 employee. These are folks that typically are considered “private contractors” and are given a 1099 at the end of the year to show earnings (instead of a W-2 like most employees). In this case, lenders need a 2 year history receiving that type of income. The reason for that is 1099 employees will sometimes have some unique write-offs on their tax returns that could possibly have an impact on what their actual net earnings are.

The problem with this is that many times 1099 employees are paid on a salary or set amount of income for a set amount of time. So basically, the borrower is guaranteed $X for the next X number of months, but can’t use that income to qualify because they don’t have a two year history of being a 1099 employee. Does that make sense? Heck no! Especially if that individual has worked in that same line of work in the past and has a degree in that field, but life isn’t always fair, so don’t try to get something you can’t get and focus on what you can get.

The reality is that all of the above scenarios are fairly common and people think they are stuck until they get a breath of fresh air learning about portfolio loans.

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