When Freddie Mac and Fannie Mae announced their new lending rules last year, I started telling everyone who would listen that they need to start using portfolio loans to finance their investments. That generated hundreds of questions from investors who want to know more about portfolio loans and some seem to be a little confused. So, let’s break it down.
A portfolio loan is just a loan that is made by a lender that does NOT get sold into the secondary market i.e. Fannie Mae and Freddie Mac. These lenders are typically small banks and credit unions. Because they don’t sell the loan off to Freddie or Fannie, they don’t have to follow any of the stupid new rules such as a maximum number of 4 financed properties* and no unseasoned cash out. There are portfolio lenders out there that allow an unlimited number of financed properties and unseasoned cash out. (*Fannie has eased up on this rule but you’re required to have 6 months’ payments in cash reserves for each property you own!)
I spoke with an investor a few days ago who has 7 financed properties with Wells Fargo and he was certain they are a portfolio lender because he sends his payment to them every month. He was surprised that they refused to refinance any of the loans because of the “max 4 financed property rule.”
Well, Wells Fargo is NOT a portfolio lender. They are a conventional lender. They sell their residential loans to Freddie Mac which means they have to follow the Freddie rules (bad). They have retained the servicing rights which is why the payment still goes to them every month but make no mistake, they will not do anything cool.
So, what kind of loans do portfolio lenders make? Lots, but the ones we are concerned with are LLC loans, blanket loans and master loan commitments. Let’s look at each one individually.
Portfolio lenders will originate and close a loan in the name of your LLC. That means it doesn’t report to your personal credit report. The LLC does not have to be two years old and does not have to have any assets or cash flow. You are still personally guaranteeing the loan, it just won’t show up on your personal credit which means if you want to get a Fannie or Freddie loan you can.
The credit report is what tells the conventional lender’s underwriter how many properties you have financed so if you have 25 LLC loans but none are on your personal credit, then the underwriter at Wells will write ZERO in the box that asks for the number of financed properties you have.
A blanket loan means one loan that “wraps” many individual loans into one loan. If you have 25 LLC loans, you make 25 checks out each month, pay 25 tax bills and pay 25 insurance bills. Plus you have 25 different rates. And if they are adjustable rates, good luck trying to keep up with when they need to be refinanced.
A blanket loan will take all 25 of those loans to make one big loan requiring one payment each month at one rate. This is a cool strategy for people that are buying or refinancing in bulk since its one loan that goes through underwriting; not 25.
One thing to watch out for on these loans is the release policy which is what happens when you want to sell or refinance one property that is in the blanket. Some lenders will allow it with a fee, some won’t allow it at all and will call the whole blanket loan due and others will require a substitution of collateral. That means you’ll have to put another property of equal or greater value in the blanket to take the place of the property you’re taking out.
Master Loan Commitments
Once you establish a good relationship with a portfolio lender, you can take your business to a whole new level with a master loan commitment. Let’s say you are a rehabber that likes to keep properties long-term as rentals. You buy them with hard or private money, fix them up and then you refinance them. If you are using conventional lenders, you can only have three rentals TOTAL because that maximum 4 financed properties rule includes your primary residence.
Well, you can negotiate a deal with the portfolio lender where they agree to refinance all your FUTURE deals up to $1, $2, $3 even $5 million dollars over a 12 month period. That way you’ll never have to worry about where the refinance will come from or IF it will actually go through.
That’s just a few of the cool loans you can do with portfolio lenders.