Conventional Mortgages vs. Portfolio Loans
Detroit, MI · Member since 2016 · 24 posts · 6 votes
Hey BP Community!
As I am forming a strategy to begin financing deals I wanted to know if there was an advantage to using conventional loans until I am maxed out at my 10 mortgages (thanks Fannie) or should I go right to using a portfolio lender? The types of properties I plan on acquiring are older multi family (1-4 units) homes that are in need of rehab. I hope to use the BRRRR strategy.
Looking forward to hearing your thoughts!
Hey @Hannah Wilkinson...I personally feel there are no obvious advantages to using conventional vs. portfolio lending. Portfolio lending is typically when the bank keeps the loan / mortgage on their balance sheet instead of selling (syndicating) it to other banks or credit investors. Banks typically standardize the loans they originate if they sell them off, especially to Fannie and Freddie (Fannie and Freddie are buying such large amounts of loans they have have policies dictating which loans they would like to help them - Fannie / Freddie - manage buying loans from originating banks).
Portfolio lenders can be more flexible since their credit officers are not worried about selling the loan into the capital markets. The benefit to portfolio lender is that they can work with you on a case by case basis. The downside is that the underwriting process may take longer since it's not standardized.
So I would just look at the terms being offered by either conventional or portfolio lender and see what works best for you.
In my experience conventional lenders are great for resi transactions because they can act quickly. On the commercial side, I've had the best experiences with portfolio lenders given they can be more creative / flexible with terms / structure, etc.
Hey @Hannah Wilkinson...I personally feel there are no obvious advantages to using conventional vs. portfolio lending. Portfolio lending is typically when the bank keeps the loan / mortgage on their balance sheet instead of selling (syndicating) it to other banks or credit investors. Banks typically standardize the loans they originate if they sell them off, especially to Fannie and Freddie (Fannie and Freddie are buying such large amounts of loans they have have policies dictating which loans they would like to help them - Fannie / Freddie - manage buying loans from originating banks).
Portfolio lenders can be more flexible since their credit officers are not worried about selling the loan into the capital markets. The benefit to portfolio lender is that they can work with you on a case by case basis. The downside is that the underwriting process may take longer since it's not standardized.
So I would just look at the terms being offered by either conventional or portfolio lender and see what works best for you.
In my experience conventional lenders are great for resi transactions because they can act quickly. On the commercial side, I've had the best experiences with portfolio lenders given they can be more creative / flexible with terms / structure, etc.
@Suhan Junaid Thank you for your response, this was very helpful!
I know this thread is over a year old, but I found it searching for an issue I've come across. On the BP forums I've read that you're allowed to have up to 10 conventional mortgages before you have to start using portfolio loans, aka ARM loans. In my experience this has not been the case. I've talked to several lenders about obtaining financing for my fifth rental and they all say you can only have four conventional mortgages. Two of these lenders I trust pretty well and don't think they would lie to me. Luckily for me, my fifth rental is paid off and not stuck in a hard money loan, that would suck. Has anyone else had trouble obtaining more than 4 conventional mortgages?
Thanks for the reply Mary. I also found this article after I made that last post https://themortgagereports.com/7395/the-5-10-properties-program-is-for-investors-with-more-than-4-properties-financed
It seems you can most definitely get up to 10 conventional mortgages. It’s just more work for the underwriters, which I guess is why they don’t want to do them. Personally I would prefer to have the fixed rate of conventional loans, however the lenders I’ve been using tell me that portfolio loans are a lot easier to acquire and there’s no limit to how many you can get.
That’s what I’m thinking too Mary. It’s a shame I can’t use the lenders that I’ve been using. They are not national chain banks but local. I would’ve thought that they could do the 5-10 mortgages that I may need. The strange thing is he was more than willing to give me a conventional mortgage for a personal residence.
Continue calling around to different lenders in your local area. Fannie Mae, the government agency that backs many lenders, allows up to 10 conventional mortgages. Some lenders won’t go up to 10, because they put “overlays” on top of Fannie Mae’s requirements. The first few loans are easier than the last few loans, due to the amount of down-payment and reserves that are required.
To maximize building your portfolio, you might have one spouse acquire up to 10 mortgages (and up to 4 doors or units per loan) and then the other spouse could qualify for up to 10 mortgages (and up to 4 doors on each mortgage).
I decided to make a list for my local real estate group, and called every bank in the city of 100k in which I invest, and created a long list of lender that will lend on investment property. I asked for recommendations for other Investor friendly lenders. Some wanted me to talk to their commercial department, some were happy doing the 10, some only wanted to do the 4 mortgages.
@Keith J., get in touch with a mortgage broker or a find a local / community bank that can do a "scattered site" loan. It's a loan which packages multiple properties into a single loan, so it's terms are typically hybrid between commercial like and resi loans.
I made about 20/25 calls in my area before I found a bank that would do such a loan.
I think the easiest way to get going on this is to have a written out email and call script. Most banks you call will send you to a voicemail. So I started asking for the person's email before being transferred to the voicemail.
Then I would leave a voicemail (using the script saved me time since I wouldn't have to think about it and i would mention all relevant info since I had it in front of me), I'd also let them know I'd follow up with email, oh and leave your phone # twice so they don't have to replay the message to get it. Then send your standard email in!
Good luck!
Suhan