Blanket mortgages allow property owners to purchase or refinance two properties with one mortgage. This is helpful for people with multiple properties as they don’t have to apply and qualify for more than one mortgage or deal with multiple lenders. Blanket mortgages save time, and in this post, I will explain how they work, give examples, and more.
What Is a Blanket Mortgage?
A blanket mortgage is a single loan that allows borrowers to buy multiple real estate properties under one mortgage. Instead of having multiple mortgages for multiple properties, this type of mortgage allows borrowers to buy multiple properties with a single mortgage.
How Does a Blanket Mortgage Work?
A blanket mortgage is one financial agreement allowing the borrower to hold multiple properties. These loans are better than individual mortgages if the buyer is a multi-property investor.
For this type of mortgage, the lender assesses the financial profile and creditworthiness and determines whether the borrower can repay the loan. If the borrower defaults on the loan, he will lose all the properties he has obtained through the blanket mortgage.
When the homeowner sells any of these properties, the portion of that loan is due, but the remaining mortgage continues as planned according to the terms and conditions. The main feature that makes a blanket mortgage unique is the release clause that allows the borrower to sell a single property and release it as a liability without obtaining a new mortgage.
Features of a Blanket Mortgage
The following are the main features of a blanket mortgage:
Release Clause
The release clause allows the borrower to sell a single property covered by a blanket mortgage without affecting a due-on-sale clause. The due-on-sale clause requires the borrower to pay the entire mortgage, but the release clause helps prevent this.
Recourse
Recourse means the lender can obtain your assets if the borrower defaults on the mortgage. Most blanket mortgages are recourse loans, which help the lender reduce the risk due to default.
Geographic Limitations
Some lenders will put a limitation on where the property is located. For instance, the borrower can purchase properties from specific geographic locations only.
Limitations on Similar Properties
A few lenders will require the borrower to purchase only certain properties. They might also restrict the borrower in terms of the variety of the properties. For instance, the lender might ask the borrower to purchase a mix of residential and commercial properties.
Why Should One Obtain a Blanket Mortgage?
With a blanket mortgage, there is no limit to the number of properties the borrower can obtain with one loan. These loans are large and are not intended for a primary residence. These are investment loans meant for real estate investors who construct homes, rent, or flip properties as a business. The following are the main reasons why one should obtain a blanket mortgage:
Refinancing Multiple Commercial Loans for Consolidation
The main reason one should obtain a blanket mortgage is when the borrower wants to consolidate multiple loans from different lenders with one financial agreement. This mortgage is helpful for growth, especially if the investors want to buy various real estate properties. With multiple properties, the investor can negotiate better rates and terms, lowering monthly payments and improving net cash flow.
Simplifying the Mortgage Paperwork
Blanket mortgages are suitable for lenders who want to avoid managing different loans and lots of paperwork. With multiple lenders and mortgages, there is more paperwork and documentation and repeated submission of credit information. This also saves time and effort, which would otherwise be wasted on asset verification, initiating loans, and credit approval.
Gaining Access to More Equity
Blanket mortgages allow real estate investors to add all the equity across their portfolios. This helps the investors maximize their profit by pooling all properties. With a blanket mortgage, the borrower can get a greater amount of cash by releasing their properties and using it for further better investments.
Who Should Obtain a Blanket Mortgage?
Blanket mortgages are specially designed for investment properties and are not meant for residential properties. These mortgages are a perfect option for the following:
- Rental property investors
- House flippers
- Builders and developers
- Business development
Rental property investors can benefit from blanket mortgages as their options are limited if they obtain a mortgage from conventional lenders. House flippers can also benefit from these mortgages; they can buy multiple properties for selling them in the future. Flippers can pay off a single portion of the loan for selling one property. These mortgages are also helpful for builders and developers to purchase lands, construct properties and sell them. Lastly, these loans are good for business development as well. So, if the borrower is planning to expand their business, the blanket mortgage helps with the financing process.
Blanket Mortgage Examples
Example: Suppose Tom wants to purchase 140 acres of land, which comprises five properties. He obtains a blanket mortgage to finance all the properties, which cost around $1 million (all seven properties). The following are the details of the blanket mortgage he obtains:
- Loan amount: $1 million
- Down payment: 25% ($250,000)
- Term: 30 years
- Interest rate: 5%
- Amortization period: 30 years
- Required cash reserves: 6-months payments
- Loan-to-value ratio: 50%
Tom is able to purchase all five properties with a single mortgage. He paid down $250,000 and added a release clause in the mortgage terms and conditions. According to this clause, he can sell any single property out of the five properties whenever he wants, and that too without refinancing the mortgage. Five years later, let’s say Tom had to sell a property to meet a financial emergency. He sold a property using the partial release clause on the loan agreement and paid off the portion of that collateral covered by the property he sold. Now Tom has paid one-fifth of the blanket mortgage, and the remaining mortgage for the four properties continues as agreed.
Frequently Asked Questions
Are Blanket Mortgages Expensive?
Blanket mortgages may require a minimum of 25% down payment, and the loan term may range from 2 to 30 years. The minimum amount required for a blanket mortgage is $75,000, and the interest rates can range between 4% and 11%. Besides that, there are loan origination fees, which may range from 1% to 3% of the loan amount. Depending on the size of the loan, the lender might require a downpayment which may vary between 25% and 50%. If the downpayment is up to 50%, it will be expensive.
What are the Factors that Affect the Cost of a Blanket Mortgage?
Two main factors affect the cost of a blanket mortgage. These two factors are property type and status. The lender will charge an interest rate and require a down payment based on these two factors. Plus, the cost will be higher if more risks are associated with the property. One thing to note is that the term ‘property status’ is used with blanket mortgages only. By property status, we mean the stages of a property. For instance, if the property is in the development phase, entirely constructed, or is just a piece of land.
Who can Apply for a Blanket Mortgage?
Blanket mortgages are available for everyone, including individuals, corporations, partners, and non-profit organizations. However, the lenders may require a thorough credit check and evaluation of credit history. Since it is a risky investment, the lender will ensure that the borrower has a stable income and enough finances to make monthly payments on the mortgage.
What are the Benefits of a Blanket Mortgage?
One of the main benefits of a blanket mortgage is that the property owner can have more cash in hand and sell the assets whenever they want. If the homeowner has multiple properties with a blanket mortgage, he can sell one and still maintain the mortgage for other properties. Most traditional lenders don’t offer blanket mortgages; these loans are mostly available through commercial lenders. These commercial lenders only provide loans to professional real estate investors with experience in buying and selling multiple real estate properties.
What are the Disadvantages of a Blanket Mortgage?
While blanket mortgages have many benefits, a few disadvantages must be considered before applying for them. Blanket mortgages have stricter eligibility requirements; for instance, they will need a higher credit score, higher down payment, and lower debt-to-income ratio. Besides, many risks are involved with these mortgages, as the buyer can lose all the properties if they default on the loan. Sometimes a blanket mortgage might require a balloon payment at some point in the loan, which is a single huge payment for paying off the loan.
What to Know for the Real Estate Exam
Blanket mortgages are valuable tools for purchasing multiple real estate properties. These mortgages can be beneficial for real estate investors. Though these loans might not be the right choice in all situations, they will save time and money if the borrower wants to purchase more than one property. Blanket mortgages are also a good option for businesses that operate in more than one location. However, if the borrower defaults on the mortgage, they can lose all of the properties obtained from a blanket mortgage. I hope that you’ve understood how blanket mortgages work. Go through our real estate vocabulary to learn more about.
