If you are creating a rental portfolio, you should know that, even though technically there’s no limit to how many conventional mortgages you can acquire, getting more than four is pretty much impossible. In this scenario, most buyers resort to private lenders, who offer much more flexibility around portfolio loans.
In this article, we’ll discuss the main differences between private lenders and banks in regards to owning several rental properties.
What Is a Portfolio Loan?
Getting a portfolio loan can be a good strategy. It may require a lower credit score, a smaller down payment, more lax approval standards, and all in all, allow you to borrow a bigger amount than a regular mortgage program could provide.
Unlike conventional loans, a portfolio lender’s loans are not resold in the secondary market. A portfolio lender generates fees from originating mortgages and profits from the net interest rate spread between interest-earning assets and the interest paid on deposits in their mortgage portfolio.
So how do you get a hold of funding for a high rental real estate project?
When it comes to investment strategies, there are several opportunities. Private and traditional mortgage lenders encompass some of the most common investment sources for property financing.
Before deciding on the best option for your real estate portfolio, let’s take a moment to discuss the differences between private lenders and bank mortgages.
Ask Yourself: Is a Portfolio Loan Right For You?
Portfolio loans are a viable solution for:
- Self-employed people with a checkered credit history of bankruptcy, foreclosure, or other issues.
- Those earning a high income but have a low credit score.
- People looking to buy a controversial property that doesn’t qualify for a traditional loan program.
Private Lending vs. Bank Lending
Even though both entities are in the money-providing business, they each have their own features.
Granted, banks are usually less expensive but tend to be harder to work with, especially when getting a loan approved. Private lenders can be more flexible and responsive but have a higher price tag.
How Do Bank Lenders Operate?
When it comes to choosing a portfolio mortgage lender, banks operate by assimilating funds from the depositor, paying back a very low-interest rate, and lending money out to borrowers at moderately higher rates. This allows them to profit from the spread between what they are paying — and the collectible interest.
If needed, federally chartered banks may borrow from the federal government at a low rate. In this case, the bank can lend said funds out at a higher rate and derive income from the funds.
What Is a Private Lender?
Private lenders can be funded by investors, banks or both. A private lender will accept funds from private investors and use them to loan private businesses.
The investors will expect a fair return from their investment, which means that the interest rate from the bank-borrowed funds is notably higher than what the banks are being charged for. This is why a private lender won’t come cheap, the high bill being passed on to the ultimate borrower.
Also, portfolio lenders, while making loans the traditional way to consumers, prefer to keep the loans on their own books, rather than selling the mortgages to third-party agencies.
Private Lenders vs. Bank Mortgages: A Quick Comparison
Private Lenders
- Have higher interest rates (are more expensive)
- Provide a faster and easier approval process
- Tend to be less regulated / more flexible
- Offer custom loan options.
Banks
- Offer lower interest rates
- Have a slower approval process
- Provide more scrutiny during the approval process (including credit audit)
- Are less flexible due to being subjected to Government Regulations
A Closer Look On Private Lenders vs. Getting a Bank Mortgage
Unlike private lenders, banks are subjected to several state and federal regulations, which can hamper the lending process. On top of that, banks can also be influenced by several governmental and semi-governmental programs.
These programs usually dictate which companies are eligible for a bank loan and what borrower profiles should look like.
On the flip side, while private lenders are still under the state and federal law’s watchful eye, they are notably less regulated. This leads to more flexibility regarding the type of loans they can make and the customers they decide to endorse.
In general, it’s easier to get approved by a private lender than a bank. Private lenders can tailor-make each loan based on an internally set criteria such as credit scores, loan to value ratio (L2VR) and debt to income levels.
Bank approvals are usually run through a computer program and are based on algorithms. Private lenders are known to have a more common-sense approach to analyzing the issues and coming up with a solution.
When it comes to credit history, banks will (understandingly) conduct a thorough research into your financial past, tracing every documented income source. This will make it especially hard for self-employed borrowers to qualify for a bank loan.
A private lender will also take an investigative approach but might be more open to overlooking past flaws when presented with a valid explanation.
Selecting The Ideal Lender For Your Real Estate Investment
For a high rental portfolio, keep in mind: the price difference between a bank lender and a private one is usually negligible when negotiating a short-term mortgage loan.
For those looking to immediately invest in property, a private lender will approve the loan faster, reducing the red tape on account of the borrower. This, in turn, will allow the borrower to grow their business faster — making the extra cost worthwhile.
In conclusion, banks are still a viable option if you have a simple straightforward property to finance. At the same time, a private real estate lender should be more open in financing a loan on a controversial or otherwise challenging property in a shorter time.
Bottom Line
Deciding on the type of real estate lender that best suits your needs is more complicated than just balancing costs. A borrower that doesn’t qualify for a bank loan can end up wasting months waiting for a decision instead of getting approval from a private mortgage lender and moving forward.
Consider that sometimes what initially appears to be the most budget-friendly loan may end up being highly expensive.
To find the best portfolio loan, ask the help of an experienced mortgage broker. If you live in BC, Canada, and have irregular income, or fall outside the conforming mortgage requirements, get in touch with us. We can help you find the best alternatives for a wide variety of needs, such as home equity loans, construction and commercial loans, bad credit mortgages, and more.
We can connect you with selected local lenders, and help you find a mortgage financing that nets you a lower monthly cost, with loan fees and charges that can be recaptured with monthly savings in the least time possible.
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