Investor's Loan Guide by Graham W. Parham

Portfolio Loans
Before the mortgage crisis of 2008, there were many portfolio lenders in
the marketplace offering non-prime loans to investors. The most famous
product that many seasoned investors utilize was the “Option Arm.” The Option
Arms typically offer a lot of flexibility from the standpoint of payment options
as well as qualifying options. Many say that the Option Arm was abused in
many ways which allowed loan officers to put families into homes that they
really couldn’t afford. This part is true in some cases, but for investors, it made
a lot of sense on paper because of the flexible payment options. With the new
Dodd-Frank Act in place, portfolio lenders were forced to eliminate these
products.
Portfolio lenders act very much the same way as your normal
conventional lenders, but with different guidelines. Most all their loans are
underwritten manually. They do not rely on Fannie Mae or Freddie Mac’s
underwriting engine to approve their loans. Each loan is examined differently
to make sure the loan falls within the portfolio guidelines. These lenders do have
a niche in the marketplace because sometimes these loans do not fall into the
normal conventional guidelines. These are not subprime lenders but make
sense lenders. Their down payment and loan terms requirements may vary as
well as their credit requirements.
Private Money Loans (Hard Money)
Private mortgages provide investors substantial returns at interest rates
that are compounded several times annually. The rates on these types of loans
are much higher than that of the traditional conventional loan, not to mention
the upfront cost. Private mortgages (also called “Hard Money Loans,” trust
notes, private notes, etc.), are in my opinion, much safer than paper
investments because they are secured by real property. I have personally seen
settlement statements where hard money lenders that charge four & five
points upfront at closing with interest rates anywhere from 10% to 20%.
It is completely legitimate for an individual to offer a private mortgage
for a home purchase giving a buyer a non-bank option for financing. Many
rehabbing companies will take advantage of hard money because of the
short-term nature. It allows a rehabber to purchase the property and roll in the
closing cost in addition to the rehab cost. Once the rehab is done, the property
is sold for a profit, and the hard money loan is paid off. Traditional lending is
12