Once you move beyond conventional and FHA financing, two doors open: portfolio loans and commercial mortgages. They overlap, but they serve different properties, different borrowers, and different strategies — and choosing wrong can cost you basis points, flexibility, or the deal itself.
What Is a Portfolio Loan?
A portfolio loan is held on the lender's own balance sheet rather than sold to Fannie Mae or Freddie Mac. Because the lender does not have to conform to agency rules, they can write their own:
- Community banks and credit unions are the classic sources
- Terms are negotiable: interest-only periods, blended rates, flexible documentation
- Underwriting is relationship-driven — a banker who knows your track record can approve what an algorithm rejects
- Rates typically sit between conventional investor loans and hard money
What Is a Commercial Mortgage?
Strictly, a commercial mortgage covers properties zoned and used for commercial purposes — including 5+ unit apartment buildings. For 2-4 unit properties, "commercial-style" loans (often from the same banks) apply commercial logic to residential assets:
- Underwritten primarily on NOI and DSCR, not personal income
- Terms of 5, 7, or 10 years fixed, then a balloon or reset
- Amortization of 25-30 years keeps payments manageable
- Almost always recourse at this size (personal guarantee required)
- Rates priced over a benchmark (SOFR or Treasury) plus a margin
Side-by-Side Comparison
| Feature | Portfolio Loan | Commercial-Style Loan |
|---|---|---|
| Typical property | 1-4 units, oddball assets | 5+ units; sometimes 2-4 |
| Underwriting focus | Borrower relationship + property | Property NOI above all |
| Fixed period | Up to 30 yrs (bank-dependent) | 5-10 yrs, then balloon/reset |
| Recourse | Usually yes | Yes (non-recourse usually needs 5+ units and low LTV) |
| Prepayment | Negotiable | Often yield maintenance or step-downs |
| Speed | Moderate | Moderate-fast |
| Best for | Non-warrantable condos, unique properties, scaling | Cash-flowing buildings, long-term holds |
When a Portfolio Loan Wins
- The property does not fit agency boxes: mixed-use storefront-plus-apartment, a non-warrantable condo, a property with an unpermitted unit
- You have an unusual income profile and a real banking relationship
- You want interest-only flexibility during a renovation period
- You are over the 10-financed-property conventional cap and DSCR pricing is unattractive
When a Commercial-Style Loan Wins
- The building's income is strong and verifiable — NOI-driven underwriting rewards good buildings regardless of your personal DTI
- You are buying 5+ units where commercial is the only game in town
- You want maximum leverage on a strong deal — some commercial lenders go to 80% LTV on 5+ units with 1.35+ DSCR
- You plan to hold long-term and refinance before the balloon
The Balloon Risk (Read This Twice)
A 7-year fixed commercial loan amortized over 30 years has a large balloon payment at maturity — you owe the remaining balance in a lump sum. Your exit plan must exist before closing: refinance, sell, or pay down. Investors who bought in 2013-2015 with 7-year balloons faced the 2020-2022 rate reset with no plan. Always underwrite your exit at today's rate and a stress-case rate 2% higher.
Questions to Ask Any Portfolio or Commercial Lender
- Is this recourse or non-recourse, and what triggers carve-outs?
- What is the prepayment penalty structure (yield maintenance vs. step-down)?
- What DSCR and LTV do you require for this property type?
- What happens at maturity — extension options, reset terms, refinance expectations?
- Do you escrow taxes and insurance? Do you require a CapEx reserve account?
Compare Your Full Financing Picture
Run the payment side of any loan offer through our DSCR Loan Calculator to see how the property's rent covers the proposed PITIA — the same math the commercial lender is doing on the other side of the table.