Revisiting Portfolio Loans

December 13, 2012

It’s been interesting this year looking at the search terms people use to find this blog. Aside from those looking for me specifically, or searching “Cambridgeville,” it seems the two most common searches that lead people here are regarding multiple-offer scenarios and portfolio loans. Since these seem to be the hot topics of the day,  I thought it would be worth reposting both articles, starting here with a Q&A on portfolio loans. I’ve added a couple additional points, which appear bracketed in blue text.

Mortgage Savvy: The Skinny on Portfolio Loans (originally posted October 29, 2010)

Many people manage to go through life without ever needing a portfolio loan. That said, there are many home-buying scenarios in which a portfolio lender may be your only financing option. With that in mind, I’ve put together answers to some typical questions on the subject. If you have any others, just let me know and I’ll add them to the list!

Q: What exactly is a portfolio loan?

A: A portfolio mortgage loan is one that a bank holds onto as an investment, rather than selling it off on the secondary market (Fannie, Freddie). [Banks offering portfolio loans are almost always smaller, local banks.]

Q: When are portfolio loans necessary?

A: Portfolio mortgage loans may be necessary in two general circumstances:

1) Your credentials as a buyer do not meet the underwriting guidelines set by the secondary market (e.g., your credit score is too low, insufficient income); or

2) The home you want to buy does not meet the underwriting guidelines. When this comes up, it is generally in a condo situation. For example, you may need a portfolio loan if the condo you want to buy…

…is one of the first units sold in a new condo conversion

…is in an association where more than 20% of the building’s gross living area is commercial

…is in an association with too few owner occupants (owner occupancy requirements vary by the size of the association)

…is in an association where one person owns more than 10% of the total units

[Homeowners selling a condo that falls into any of these categories need to be aware of this fact so that they and their agent can fully vet potential buyers to make sure they are willing and able to finance with a portfolio loan.]

[Construction loans are also a form of portfolio loan, required when a house is in such rough shape that it is not conventionally financeable. For example, it lacks heat, doesn’t have a functioning kitchen and/or bathroom, or is otherwise uninhabitable.]

Q: Are the terms different for portfolio loans?

A. Yes! Portfolio loans [generally require at least 20% down], have slightly higher interest rates and are often adjustable rate loans (though some lenders do offer fixed-rate loans). Your closing costs may also be higher if you get financing through a portfolio lender.

Q: How can I find a portfolio lender?

A. Very few banks offer portfolio loans, and the funny part is that even those who do don’t seem to advertise the fact. [Recently, some banks who had offered portfolio loans have stopped for various reasons.] Lenders who do offer portfolio loans are often motivated by one of two reasons: either because they have a relationship with the borrower or because they have lent money to a developer and want to make sure they are repaid, so they help buyers to finance the properties.

If you are interested in a particular property that will require portfolio financing, talk to your buyers’ agent. She can probably point you to a lender that can help. Also, sometimes listing agents will have already sourced a lender or two who is willing to provide financing, particularly in cases of new development/condo conversions.

If you’re in the process of applying for a mortgage or pre-approval, this article might help you understand–or at least reconcile yourself to–the often mind-numbing process…

The Perfect Loan File | Forbes

 

 

 

This is a topic that comes up all the time with homebuyers, so I wanted to share a recent write-up by William M. Mullin, the President of NE Moves Mortgage. I’ve added a few of my own comments in brackets within the text.

There can be confusion between the terms pre-approval and pre-qualification. Some loan officers and lenders will occasionally use the terms interchangeably [and I believe Bank of America, and perhaps a few other lenders now ONLY offer pre-quals]. However, there is a significant difference.

Generally speaking a pre-qualification merely means that the customer has met with the loan officer. The customer then shares certain of their information with the loan officer, typically how much they earn, how much they have available to put as a down payment, and, they hopefully discuss their debts. The loan officer then takes this information, runs the borrowers debt to income ratios at current interest rates and tells the customer they are pre-qualified for a certain loan amount. This information is for the benefit of the potential borrower as they then think about a purchase. While the pre-qualified amount may be shared with an agent or a potential seller, it is clearly not a pre-approval. [Frankly, a pre-qualification letter is not worth the paper it’s printed on, since nothing is verified.]

A pre-approval is a much stronger document. Here the loan officer should secure the consumer’s permission to actually pull their credit report to validate the status of the borrower’s credit and determine their FICO scores. At this stage any negative credit, disputes or discrepancies should be addressed. The loan officer should also validate the borrower’s income. This should be done by reviewing the borrower’s pay statements, W-2’s and tax returns. [This is VERY important because the requirements for a salaried employee and an independent contractor being paid with 1099s are different. I’ve had buyers who were “pre-qualified” for a certain purchase price based on their stated income, but because they were independent contractors and didn’t yet have two years’ of tax returns, they were in fact not qualified to buy anything — only a thorough pre-approval will reveal this.] Additionally the loan officer should validate the borrower’s assets by reviewing their bank and/or brokerage statements. Questions regarding potential gift funds and the donor’s ability to give these funds should also be addressed at this point. The loan officer will then submit all of this information to either Fannie Mae or Freddie Mac’s automated underwriting engines. Once all of this has been done the loan officer or the lender can issue a pre-approval that is quite strong. Is it bulletproof?

Sadly, very few things in life are 100% certain. While the consumer may be well qualified for the loan there is always the possibility that the property fails to appraise out. [Or, in the case of condos, the association has low owner-occupancy, too much commercial space, or one entity that owns more than 10% of the units.] And, unfortunately, once in a great while the consumer may fail to provide the loan officer with accurate information which can then negate the pre-approval. Or, once the pre-approval has been issued, the consumer may take an action that invalidates the pre-approval. Some classic examples of this include the consumer losing their job, the consumer changing their job from that of a salaried employee to becoming selfemployed or by increasing their debt level through new borrowings after the initial credit report was reviewed.

Under any circumstances, however, the pre-approval is the way to go. When properly done, as outlined above, it can give both the agent and the seller a high degree of certitude that the transaction will be consummated.

~ By William M. Mullin, President, NE Moves Mortgage, LLC

By the way, you should never have to pay for a pre-approval. At NE Moves Mortgage, they are always free. Contact Jono Sexton at my Cambridge office and he’ll take good care of you!

Jono Sexton, NE Moves Mortgage

Many people manage to go through life without ever needing a portfolio loan. That said, there are many home-buying scenarios in which a portfolio lender may be your only financing option. With that in mind, I’ve put together answers to some typical questions on the subject. If you have any others, just let me know and I’ll add them to the list!

Q: What exactly is a portfolio loan?

A: A portfolio mortgage loan is one that a bank holds onto as an investment, rather than selling it off on the secondary market (Fannie, Freddie).

Q: When are portfolio loans necessary?

A: Portfolio mortgage loans may be necessary in two general circumstances:

1) Your credentials as a buyer do not meet the underwriting guidelines set by the secondary market (e.g., your credit score is too low, insufficient income); or

2) The home you want to buy does not meet the underwriting guidelines. When this comes up, it is generally in a condo situation. For example, you may need a portfolio loan if the condo you want to buy…

…is one of the first units sold in a new condo conversion

…is in an association where more than 20% of the building’s gross living area is commercial

…is in an association with too few owner occupants (owner occupancy requirements vary by the size of the association)

…is in an association where one person owns more than 10% of the total units

Q: Are the terms different for portfolio loans?

A. Yes! Portfolio loans generally have slightly higher interest rates and are often adjustable rate loans (though some lenders do offer fixed-rate loans). Your closing costs may also be higher if you get financing through a portfolio lender.

Q: How can I find a portfolio lender?

A. Very few banks offer portfolio loans, and the funny part is that even those who do don’t seem to advertise the fact. Lenders who do offer portfolio loans are often motivated by one of two reasons: either because they have a relationship with the borrower or because they have lent money to a developer and want to make sure they are repaid, so they help buyers to finance the properties.

If you are interested in a particular property that will require portfolio financing, talk to your buyers’ agent. She can probably point you to a lender that can help. Also, sometimes listing agents will have already sourced a lender or two who is willing to provide financing, particularly in cases of new development/condo conversions.

Consider This…

October 28, 2010

Low Interest Rates are Better than the Tax Credit

I just found a very cool Excel mortgage calculator template that is downloadable for free — not only does it compute your monthly payments based on mortgage amount and interest rate, but it also shows your tax savings on interest, the effect of extra payments, and a full amortization schedule.

Often when people look at the cost of buying a home versus renting, they do a side-by-side comparison of their current rent to the cost of a mortgage payment plus condo fees and property taxes. Often renting seems cheaper. And sometimes it actually is. But to get a true assessment of what makes more financial sense, you can’t forget to factor in the tax benefits of owning.

When you own a home, you can deduct the interest paid on your mortgage (which in the early years is most of your monthly payment) as well as your property taxes from your annual income. And in Massachusetts, you get an additional state income tax deduction. Here’s how it works:

SAMPLE CONDO PURCHASE PRICE: $335,000

ANNUAL PROPERTY TAXES: $1891 ($157.58 per month)

MONTHLY CONDO FEE: $104

With a 20% downpayment, mortgage amount is $268,000

Let’s assume a 5% mortgage interest rate on a 30-year loan

Monthly principal + interest on the mortgage = $1438.68

TOTAL MONTHLY PAYMENT (principal + interest + taxes + condo fee) = $1700.26

However….

The approximate interest portion of each monthly mortgage payment is $1,100 (averaged from amoritization table)

Let’s assume you’re in a 28% tax bracket

$1,100 x .28 = $308 monthly tax benefit

And your monthly property taxes are also deductible, so…

$157.58 x .28 = $44.12 monthly tax benefit

Plus MA taxpayers also get a State tax benefit from the 5% income tax

$1,100 + $157.58 x .05 = $62.88 monthly tax benefit

Let’s add up your total monthly tax benefits:

$308 + $44.12 + $62.88 =$415 monthly savings

By factoring this savings in, you get your…

ACTUAL MONTHLY COST (monthly payments – tax savings) = $1285.26

What this means to you

If you are currently paying $1500 a month in rent, just looking at your monthly mortgage, taxes and condo fee expenses of roughly $1700 might make buying this condo seem like a bad idea. But by factoring in the tax benefits and knowing that your effective monthly cost is less than $1300, you can see a clear financial incentive to buy.