As a real estate investor, I have run into problems buying rental properties because traditional lenders stopped financing me. They said I could not have more than four mortgages and I could not finance fix and flips. Those banks and mortgage companies made it sound as if I had no options. The truth was “their company or bank” would not lend to me, not that no one would lend to me. Once I found a portfolio lender, I was able to finance over 15 rentals and 20 flips at a time with the same bank. The same goes for owner-occupants who want to buy a house that needs work. As real estate agents, we have saved many deals because we convinced a buyer to change to a local bank after the national bank denied their loan.
What are Portfolio lenders?
Portfolio lenders are local banks that lend their own money and do not sell their loans. Most national banks sell their loans on Wall Street and those loans must meet specific guidelines. A portfolio lender can be a great asset because they may be more willing to finance a real estate investor. A portfolio lender will often have fewer requirements than large national banks, which makes it easier for investors to get loans.
Big banks may not finance an investor if they have more than four mortgages, but many local banks might. I have a great portfolio lender who allows me to finance as many properties as I want, as long as I continue to qualify and have enough money in reserves. Having a good portfolio lender is extremely important to my strategy, which depends on buying many properties. I would have a very hard time reaching my goal of purchasing 100 rental properties if I did not have a portfolio lender financing my properties.
Why are portfolio lenders important to investors?
Many banks will not give you another mortgage if you already have four financed properties. There are some banks that will finance between four and ten properties, but they have many restrictions. Those restrictions include a 25 percent down payment, high credit scores, and no cash-out refinance. Very few banks will give you a mortgage if you have ten financed properties or more. Most banks have restrictions on the number of mortgages they will give to one person because they sell their loans to institutional investors who only buy loans that conform to Fannie Mae guidelines.
A portfolio lender lends their own money and they do not sell their loans to institutional investors. Because portfolio lenders do not have to conform to Fannie Mae guidelines, they will lend on more than four and even more than ten mortgages. They also may allow a cash-out refinance and be flexible with many other financing options. My portfolio lender does not require a property to be in livable condition to give me a loan. Some portfolio lenders do not require an appraisal, they may not require as high of a credit score, and they might not be as concerned with debt-to-income ratios.
What type of loans does a portfolio lender offer?
Since a portfolio lender is a local bank that lends their own money, they do not have to meet Fannie Mae lending guidelines, which allows them more flexibility. However, they do not offer all the loan programs that large banks offer. My portfolio lender does not offer a 30-year fixed mortgage. My portfolio lender only offers a 15-year fixed, 5/30 ARM, or 7/30 ARM. To get the lowest interest rate, I use a 5/30 ARM on most of my rental properties. Here is a great article with more information on ARMs. Each portfolio lender has different terms and loan programs. I can put 20 percent down on as many properties as I can qualify for with my portfolio lender. Some local banks require 25 percent down, some will only offer 25 or 20-year amortizations, and some have higher interest rates. If you are looking for a portfolio lender, make sure you shop around to find the best terms.
A portfolio lender will also want you to have all your accounts and money in their bank. This is usually not a big issue for most people since a portfolio lender will have very competitive programs and products that align with the larger national banks. The better the relationship you build with a portfolio lender the better loans you will get.
How can a portfolio lender save real estate deals?
I have sold many houses in my career that were owned by HUD or a bank. They have very specific rules when selling their homes, and not all lenders know those rules. HUD is very clear they will make no repairs on homes and the buyer cannot turn on the water for inspections or an appraisal if the pipes do not hold air pressure. HUD discloses if the pipes hold pressure on their website on every HUD home for sale. We ran into problems all the time with lenders and real estate agents who did not realize they could not turn the water on until the bid was accepted and they were trying to complete an inspection.
Most lenders will not lend on a home if it cannot be verified that the water and other utilities work. When we ran into this problem we saved many deals because we told the buyer about the local lender who did not require the water to be on. The buyer switched lenders, switched loan programs, and was able to buy the home.
The video below talks about how I use portfolio lenders to flip houses.
How to find a portfolio lender
I found my portfolio lender because I am a real estate agent and I heard from other agents that my portfolio lender was the best bank for investors. After I ran into problems with my mortgage broker financing my fifth rental property, I contacted a portfolio lender to see what they could offer. The portfolio lender had the perfect loans for my investment properties. It took me about a week to move all of my accounts over to the new bank so I could easily finance new rentals.
I have since purchased 20 rentals; 16 of them were financed with the same local bank. This local bank has also financed fix and flips for me as well as raw land.
The first way to find a portfolio lender is to ask everyone you know if they know of a portfolio lender. Some people may not know what a portfolio lender is; ask them if they know a lender that likes to loan to investors. Whom can you ask?
- Real estate agents know many lenders and maybe your best source to find a portfolio lender.
- Other lenders may be able to refer you to a portfolio lender once they know they cannot give you a loan.
- Investors in the area will know portfolio lenders; the trick is meeting them. Real estate investor meetings are a great place to meet investors and get local information.
- Ask your local bank if they are a portfolio lender or what types of investor lending programs they offer.
- Ask title companies whom local investors use to finance their rental properties.
- Call your chamber of commerce and ask if they know who the most investor-friendly banks are in town.
Search the internet
The internet is the easiest way to start your search for a portfolio lender. Simply search for a portfolio lender in your state on any web search engine. I have tried this a couple of times for people in different states and I always get results. Once you find a bank that mentions portfolio lending in your state, call and ask what type of investor programs they offer.
If none of the options above is working and you cannot find a portfolio lender, you may have to resort to calling local banks in your area. Call banks that are not national chains and see what type of investor loans they offer. If they do not have what you are looking for, ask if they know which bank might. Keep trying until you have called all the local banks you can find.
Who are the best portfolio lenders?
People always ask me who the best portfolio lenders are. The best lenders I use are local, they do not lend nationally. I am in Colorado and First Bank is awesome, but if you are in another state you are out of luck with them. There are some national lenders that specialize in rental property financing who are not big banks.
What questions should you ask when looking for a portfolio lender?
Many banks do not advertise that they are portfolio lenders and many people working at the bank may not even know what a portfolio lender is. If you call a bank and they say they are not a portfolio lender, do not give up! Ask to talk to a loan officer and ask specific questions about what type of investor programs they offer. Here are some good questions to ask:
- Do you loan to investors who already have four mortgages?
- Do you have a commercial loan or a business loan department?
- Do you sell your loans or keep them in-house?
- Do you allow investors with four or more mortgages to do a cash-out refinance?
- What terms and loan programs do you offer investors? ARM, 15-year, 30-year fixed, balloon?
- What interest rates do you charge and what are the initial costs for your loans?
- What loan-to-value ratios do you offer investors for a new purchase and a refinance?
- What are your seasoning requirements for refinances?
How does a portfolio decide who is denied or approved?
When I first went to my portfolio lender I was told that I did not have enough experience and they could not help me. I was obviously frustrated and had was not very impressed with the lender. About a year later someone introduced me to the same lender, but a different loan officer. They were amazing and happy to help me. I could not believe how easy it was to get a loan!
That showed it was not about the lender’s guidelines, but about the relationship and the person helping me. They care about credit scores and incomes, but not as much as many big banks. If you have a good relationship with them you may be able to get some loans done that the big banks cannot do.
Finding a portfolio lender is not easy, but it makes investing a lot easier. My portfolio lender has been awesome financing my rental properties and fix and flips. This should point you in the right direction for finding a portfolio lender in your area. If you have any questions or suggestions please leave a comment and let me know.