There are a lot of things that go hand in hand with buying property, and most of those things aren’t exactly fun. An example of something you need to learn about when purchasing a home is the plethora of available mortgage options.
A mortgage is a loan from a lender that helps you purchase a property. There are different mortgage loans depending on your needs. Portfolio mortgage loans are popular among people who don’t have regular paychecks but are an extra source of income. Have you heard about these loans?
If you find yourself torn between a portfolio mortgage loan and a conventional one, we’re here to explain the differences and tell you the better choice. Keep reading if you want to learn more before making your decision.
What Are Portfolio Mortgage Loans?
First things first, let’s have a quick glance at some basic facts about portfolio loans. They are held by the lender issuing them. Unlike other types of mortgage loans, California portfolio mortgage loans don’t need to be sold to investors in the secondary market. That’s one of the main reasons why these loans can be a bit more flexible.
The underwriting guidelines for these products are also a bit more relaxed, making them an excellent choice for self-employed people or those with an irregular income. The lender decides who they will issue the loan to, so you don’t necessarily need to present your two-year income history to be eligible.
How Do Portfolio Loans Work?
Now you know what these loans are, but how do they actually work? Portfolio mortgages work similarly to other types of loans. You (the borrower) take out a loan from the lender with the intention of buying property. The repayment period is usually around 30 years, but it can be shorter or longer depending on the agreement between the borrower and the lender.
Because these loans aren’t sold in the secondary market, the lender is the one who is responsible for the loan until it’s paid off. As a result, portfolio mortgage loans can offer more flexibility to borrowers. This makes it easier to get approved for the loan if you’re an entrepreneur, for example.
The Benefits of Getting a Portfolio Loan
If what you’ve read so far seems intriguing, you might be interested to learn about some key advantages of taking out this type of loan. We’ve gathered a few major pros of portfolio loans so you can see how appealing they sound.
No Need to Stress about the Perfect Credit Score
The first big weight off your shoulders is that you don’t need perfect credit to be eligible. As we’ve mentioned before, the underwriting guidelines for these loans aren’t so strict. So, you can still get a loan even if your credit score isn’t ideal. Of course, the interest rate will be higher if your credit score is low, but you will still have a chance to get the loan, which is a huge plus.
Forget about Collecting a Mountain of Documentation
Good news – you don’t need to provide extensive documentation to get approved for a portfolio loan. If you’re self-employed, for example, you won’t need to present your two-year income history. The lender will just need to see that you have a steady income even if you’re a start-up owner.
The Process of Approval is Quicker
Because the documentation requirements are not as strict as with a conventional loan, the approval process for these loans is usually faster. If you need to get a loan quickly, a portfolio mortgage loan might be the optimal solution.
The Possibility of Getting a Higher Loan Amount
Another advantage of these loans is that you might get a higher loan amount. That’s because the lender is the one who decides how much money to lend you. So, depending on your lender and the deal you make, your loan might be higher than a conventional one.
Portfolio Loans are Great for Investments
A portfolio mortgage can be a great solution if you’re planning on using the loan for investment purposes. You can use the loan to buy multiple properties, for example. You can also use it to refinance an investment property you already own.
You Have a Choice – a Fixed-Rate or a Variable-Rate Loan
With a portfolio mortgage loan, you can choose between a fixed-rate or a variable-rate loan – it’s up to you! That means that you can choose the option that suits your needs the best.
The Differences Between a Portfolio Loan and a Conventional One
If you’re still unsure if portfolio mortgages are the right choice, let’s compare them to conventional loans. Have a look at how these two types of loans differ from each other.
- The most obvious difference is that portfolio mortgage loans aren’t sold in the secondary mortgage market. This is different from a conventional loan, where the lender can sell the loan to another party in the secondary market.
- Another key difference is that portfolio mortgage loans offer more flexibility to borrowers. This makes portfolio loans much more desirable and accessible for people who are self-employed, for example.
- The last big difference is that the approval process for portfolio mortgage loans is usually quicker.
As you can see, there are several key differences between portfolio mortgage loans and conventional loans. Keep these facts in mind when choosing the right option for your needs.
When Should You Apply for a Portfolio Mortgage Loan?
Now that you know all there is to know about portfolio loans, it’s time to answer the question – when should you apply for one of these loans?
There are a few situations when a portfolio mortgage loan is the best choice. We’ve listed them below so you can see if any of them apply to your current situation.
- You have less than perfect credit
- You’re self-employed or have an irregular income
- You need to get a loan quickly
- You’re planning to use the loan for investment purposes
If you resonate with any of these situations, we advise you to consider this type of mortgage loan as a potential option when purchasing a home.
Are You Eligible for a Portfolio Loan?
If what you’ve learned so far sounds appealing, it’s time to find out if you’re eligible for a portfolio loan. The good news is that the requirements are not as strict as with conventional mortgages. Here are the main criteria that lenders will look at:
- Your Credit Score – As we’ve mentioned before, you don’t need perfect credit to qualify for a portfolio loan. However, a lower credit score means higher interest rates.
- Your Income – The lender will need to see that you have a steady income. If you’re self-employed, for example, they will just need to know that you have a consistent income.
- Your Debt-to-Income Ratio – This is the percentage of your monthly income that goes towards paying off debts. The lower this number is, the better chance you have of getting approved for the loan.
- Your Employment History – Mortgage lenders want to see that you have stable employment history and how long you’ve been with your current employer.
- Your Asset History – A portfolio mortgage lender wants to see that you have a history of owning assets. This shows them that you’re a responsible borrower who is likely to repay the loan.
If you meet all the criteria listed above, you should have no problem getting approved for a portfolio loan!
So, a Portfolio Mortgage Loan or a Conventional One – Which One Is Better?
The answer to this question hugely depends on your specific situation. If you have a poor credit score or are self-employed, then a portfolio loan is probably the right fit. These loans offer more flexibility and are easier to get approved for.
If you need to get a loan ASAP, then a portfolio mortgage loan is definitely something to look into. The approval process is usually quicker since you don’t need as much documentation.
So, there you have it! Now you know everything there is to know about portfolio mortgage loans and when you should consider them. Take all the facts into account when making your decision.