Portfolio lenders provide mortgage loans that are held as an investment by a bank or other entity, rather than being sold on the secondary market (Fannie Mae/Freddie Mac). The appraisal requirements and specifics are quite different than a conventional Fannie Mae mortgage appraisal. Portfolio loan availabilityand use is primarily due to the
fact that the given loan does not comply with the underwriting guidelines set by the secondary market investors.
The underwriting guidelines for a portfolio product can be far more flexible than for a loan which is being sold to a secondary investor. This flexibility can often mean that the underwriter of the portfolio program can use a much more common sense approach when evaluating things such as past credit problems, prior bankruptcies, lack of cash reserves, etc. In some portfolio programs there is no minimum credit score requirement although the borrowers use of other credit and past credit history is a determining factor in any loan program. Because of this, a very accurate appraisal report is of high importance. The appraiser must be well-versed in the requirements of each portfolio lender. Many portfolio lenders have their own set of additional requirements and specifics they want to see on each appraisal report. Since they are lending their own money and not reselling the loan, the appraisal can be the most critical deciding factor on whether the loan is made or declined. Hire an appraiser who knows the difference and is well-versed in these types of appraisals. Your portfolio loan process will go a lot smoother and faster.
Private mortgage loans are made by private lenders instead of traditional financing sources such as banks, lending institutions, or government agencies. They usually are short-term (6 months to 3 years) asset-based loans and the decision to lend is based on the equity and value of the property being put up as collateral, not on the borrower`s credit. The importance of an accurate and thorough appraisal report is foremost to the private mortgage lenders.
These loans are a source of funding for professional real estate investors who wish to acquire, rehabilitate, or cash out equity of income producing property, and those who otherwise would not qualify for conventional financing. Private mortgages also assist real estate investors who need immediate financing without the financial documentation required by traditional institutional financiers.
Private mortgage loans are very secure because they represent a maximum of 65 percent to 70 percent of the appraised value of income producing property. Once again, the appraisal report MUST be accurate. On non-income producing property, a maximum of 55 percent loan to value is lent. Investors can expect to pay higher on first liens and on second liens in this current low interest rate environment. Historically, first lien yield of six points over prime has been obtainable.
Why Borrow Private Money? Many reasons exist, but all fall into four categories.
Speed of Closing.Conventional mortgages usually take between 45 days and 90 days to fund, since institutional lenders not only need to obtain an appraisal of the property`s value, they perform a detailed, time consuming examination of the borrower`s credit history, and thoroughly evaluate the borrower`s current financial status. On the other hand, private mortgage lenders usually can complete a transaction within seven to 10 days. Since the property itself is the main criteria used to determine loan eligibility, less information on the borrower is required, resulting in a much quicker approval process.
Easy Application Process.While a borrower`s lack of up-to-date personal financial information would negate or at least delay approval for an institutional mortgage, it should have no effect on the ability to obtain a private mortgage loan. Private mortgage lenders generally base their decisions on the asset used for collateral — the property. If the property value is high enough and the income being generated from it is sufficient to pay the interest on the debt, the borrower`s personal financial situation should not affect the private mortgage lender`s decision.
Other Money Resources Are Not Available. A borrower may not qualify for an institutional mortgage loan for reasons ranging from low borrower credit scores or too much borrower debt. Further, the property itself may not support the type of loan the borrower wants
More Funds Available.Since private mortgage lenders base loans on the appraised value of the property, the borrower may be able to borrow more and therefore have less of its own capital invested in the property. In these instances, the borrower is not penalized for purchasing a property at a significant discount to market value.
Hire only an appraiser who understands the private mortgage lender’s process and requirements. Fannie Mae appraisals are now written with codes for a computer to read. Private mortgage lenders still use humans and logical reasoning to read appraisals and will usually reject appraisals written in Fannie Mae format.