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FHA vs Portfolio Lender-Who Has Best Terms and Rates
Subject: Borrower Approved on an FHA Loan Moving Forward With Local Portfolio Lender for Faster Closing
Hello,
I wanted to provide an update regarding my mortgage loan situation.
Earlier this week, I spoke with a neighbor who is an experienced mortgage lender in Northern Nevada. Although I had been hesitant to discuss my personal financing needs with him, I am glad that I did.
He has reviewed my situation and is working to obtain loan approval through his company. His lender plans to retain the loan in its own portfolio rather than selling it on the secondary mortgage market. Because he is personally involved in the file and helping expedite the process, the expected closing timeline is within the next couple of weeks.
I sincerely appreciate the time, effort, and assistance your team provided in helping me secure mortgage financing. However, because I need to close as quickly as possible, I have decided to move forward with the local lender.
Thank you again for your understanding.
Sincerely,
Rachel -
2 Replies
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From my understanding, Rachel is in an active Chapter 13 bankruptcy and is doing a cash-out refinance on an FHA loan to pay off some other business debts. Chapter 13 Bankruptcy plans are normally for 60 months, and from my understanding, Rachel is in month 18 of the 60-month repayment term. Need to keep in mind that the subject property we are talking about doing a cash-out refinance mortgage on with an FHA loan is an owner-occupied primary residence. I do not doubt that a portfolio mortgage lender can do a cash-out refinance on an investment home. Over the years, I often wondered why hard money lenders cannot lend to borrowers on their primary owner-occupied homes. I am also questioning if portfolio lenders can help Rachel by offering her a two-week fast closing on a primary owner-occupied house. No disrespect to the portfolio loan officer who is Rachel’s neighbor, but alarm bells are going off with the little I know about financing an owner-occupied property versus an investment property. Rachel already has an FHA loan approved via manual underwriting with a HUD-approved mortgage lender at 6.5%. Can you please advise if Rachel is making the right decision by ditching the FHA loan she got approved for and going with her next-door neighbor portfolio loan officer who is promising her a two-week fast closing? Isn’t it illegal for a portfolio lender not to follow TRID, Dodd-Frank, and SAFE Act rules and regulations? The portfolio loan officer said they will not sell the loan they fund on Rachel’s home and will keep it in-house? Is there a concern with federal and state mortgage rules and regulations? Besides that, what benefit does the portfolio have in extending credit to a borrower in a Chapter 13 bankruptcy repayment plan (Chapter 13 Bankruptcy is active and NOT discharged), and holding the funded loan in-house in their portfolio? This whole case scenario is not making sense to me. Can you please give me a comprehensive, easy-to-understand explanation? I like Rachel and do not want anything bad to happen to her because she can be, and is, very vulnerable. Thank you.
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Rachel is in an active Chapter 13 bankruptcy and is approximately 18 months into a 60-month repayment plan. Her property is her owner-occupied primary residence.
She already has an FHA cash-out refinance approved through manual underwriting at approximately 6.5%.
Important Facts
1. FHA financing is possible during an active Chapter 13.
FHA allows financing during Chapter 13 when the borrower has generally made at least 12 months of satisfactory plan payments and receives the required bankruptcy court approval.2. A portfolio lender can also lend during Chapter 13.
A lender that keeps the loan in its portfolio may use its own underwriting guidelines rather than FHA, Fannie Mae, or Freddie Mac guidelines. That does not automatically make the loan improper.3. “Portfolio loan” does not mean mortgage laws disappear.
Simply keeping a loan in-house does not automatically exempt a lender from federal or state mortgage laws.4. The business-purpose issue is important.
Rachel intends to use cash-out proceeds to pay business debts. A loan primarily for a legitimate business or commercial purpose may be treated differently under federal consumer credit laws, even when a primary residence is collateral.The lender should be able to clearly explain whether this is being treated as:
- A consumer residential mortgage, or
- A business-purpose loan secured by Rachel’s residence.
5. Bankruptcy approval remains extremely important.
Rachel should have her bankruptcy attorney confirm that the refinance and additional secured debt are permitted under her Chapter 13 plan and obtain any required approval from the trustee or the court.A lender promising a two-week closing should be able to explain how the bankruptcy approval will be completed within that timeframe.
6. I would not cancel the FHA approval yet.
Rachel already has a known FHA approval at 6.5%. Before giving that up, she should receive the portfolio offer in writing.Compare:
- Interest rate
- Loan amount
- Monthly payment
- Points and lender fees
- APR, if applicable
- Loan term
- Fixed versus adjustable rate
- Balloon payment
- Prepayment penalty
- Total cash Rachel receives.
- Bankruptcy approval requirements
The Most Important Questions for the Portfolio Lender
Ask the portfolio loan officer:
“Is this a consumer mortgage or a business-purpose loan?”
“What regulation or program allows you to refinance an owner-occupied primary residence while the borrower is in an active Chapter 13?”
“What bankruptcy court or trustee approval will you require?”
“How can that approval be obtained within your two-week closing timeframe?”
“Please provide the complete loan terms and fees in writing.”
Bottom Line
The portfolio loan is not automatically illegal or improper simply because Rachel is in Chapter 13 or because the lender intends to keep the loan in-house.
However, keeping a loan in the portfolio does not by itself eliminate federal, state, or bankruptcy requirements.
The biggest issue is determining whether this is truly a business-purpose loan and confirming that Rachel’s bankruptcy attorney, bankruptcy court, or trustee approves the transaction.
Until those questions are answered and the portfolio terms are provided in writing, I would be very cautious about Rachel giving up an already-approved 6.5% FHA loan.
The easiest sources to verify these points are the HUD FHA Handbook 4000.1, CFPB Regulation Z §1026.3 regarding business-purpose credit, and Rachel’s local U.S. Bankruptcy Court/Chapter 13 trustee requirements.
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