Portfolio lenders have flexibility on mortgages

STARTING OUT

August 14, 1994|By Dian Hymer

What are the pros and cons of using a portfolio lender?

A portfolio lender generates home loans that will become a part of that lender's own investment portfolio. This is in contrast to lenders who generate loans that are later sold to other investors.

Lenders who sell their loans usually sell them on the secondary money market to Fannie Mae (Federal National Mortgage Association) or Freddie Mac (Federal Home Loan Mortgage Corp.), two organizations that purchase home loans at a discount to resell to investors. Loans that are intended for sale to Freddie Mac or Fannie Mae must conform to rigid guidelines.

Portfolio lenders usually have more flexibility in qualifying borrowers. For example, Freddie Mac and Fannie Mae won't permit all of the down payment to be a gift if the borrower is applying for a 90 percent loan. Some portfolio lenders, such as Great Western, will permit all the down payment money to be a gift from parents or grandparents on a 90 percent loan.

Portfolio lenders may be able to stretch the qualifying ratios if your income is shy of what would be required for a Freddie Mac or Fannie Mae loan. Your qualifying ratio is determined by dividing your monthly housing expense (which is the total of your loan payment, property taxes, hazard insurance, mortgage insurance and homeowner association fees, where applicable) by your gross monthly income. For a Freddie Mac or Fannie Mae loan, this ratio shouldn't exceed 30 to 33 percent. A portfolio lender might allow a 40, 50 or even 60 percent ratio.

Portfolio lenders are not only more flexible in approving borrowers, they also have more latitude in approving property condition. A portfolio lender might be your only option if you need an "as is" loan to buy a property in its present condition. Some portfolio lenders will allow funds from the seller's proceeds to be held in an account so that termite or other repair work can be completed after closing.

FIRST-TIME TIP: Although portfolio lenders can work wonders for borrowers whose home purchase circumstances are out of the ordinary, this will not always be the case. Some portfolio lenders are enormous financial organizations with centralized loan origination operations. In some cases, this means less rather than more flexibility. Before submitting a loan application with a portfolio lender, sit down with a loan agent and review your particular needs. Find out if the loan processing and underwriting will be completed by local people knowledgeable about local conditions, or if it'll be handled elsewhere.

One disadvantage of using portfolio lenders is that they usually offer a limited number of loan programs. If you don't qualify for the one you apply for, you may be out of luck.

THE CLOSING: Portfolio lenders often don't charge a separate appraisal fee. From time-to-time they offer promotional deals in order to stimulate business.

Dian Hymer's column is syndicated through Inman New Features. Send questions and comments in care of Inman News Features, 5335 College Ave., No. 25, Oakland, Calif. 94618

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