Blanket mortgage: How it works and who should use it
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If you are looking to finance more than one property at a time, a blanket mortgage could be a great way to reduce costs and cut down on paperwork. Although this type of loan isn’t necessarily a fit for ordinary homeowners or first-time real estate investors, they can be a useful tool for sophisticated investors and developers of residential and commercial real estate.
What is a blanket mortgage?
A blanket mortgage, also referred to as a blanket loan, is a mortgage that covers multiple properties, with the group of assets collectively serving as collateral. Real estate developers and investors often purchase more than one property at a time, so a blanket mortgage streamlines the financing process by allowing them to group those purchases under a single loan.
The blanket mortgage can be refinanced just like any other mortgage. It also allows the borrower to sell one property from the group but retain the loan for the others (usually a mortgage needs to be repaid in full when the collateralized property is sold).
Blanket mortgages have applications in both commercial and residential transactions, including those involving development and management of multifamily housing or apartment buildings. They are also used by individuals who buy and flip homes.
“While they are usually used in a commercial context, there are residential landlords that utilize a blanket mortgage to finance a portfolio of rental properties,” says Greg McBride, CFA, chief financial analyst for Bankrate.
Who should get a blanket mortgage?
Blanket mortgages are designed for companies that buy homes in bulk, or experienced investors who own a portfolio of properties, either commercial or residential.
“This is not for a newbie, mom-and-pop landlord that is looking to jump into full-scale real estate management overnight,” McBride says.
Nor are blanket mortgages intended for people who have just two properties: a primary residence and a vacation home.
Pros and cons of a blanket mortgage
If you think blanket mortgage real estate lending might be a good fit for your commercial endeavors, consider the following advantages and disadvantages.
Pros of a blanket mortgage
- Lower closing costs: Borrowers might realize some savings with a blanket mortgage because they don’t have to pay separate closing costs and fees for each loan.
- Greater cash flow: Property owners can reinvest the money they save in closing costs back into their portfolio to acquire more buildings or launch additional projects.
- Easier administration: One loan means one interest rate, one monthly payment and one escrow account, cutting down on paperwork.
- Continuity: With a blanket mortgage, you don’t have to pay off the entire loan if you sell off just one property. (You do, however, have to pay back the portion of the loan that was securing that property — you can’t just pocket the proceeds from the sale.)
Cons of a blanket mortgage
- More expensive closing costs: While you only have to pay closing costs once, blanket mortgage closing costs are higher — sometimes significantly so — than comparable single-property mortgage loans.
- Higher down payments: Blanket mortgages require a down payment that can be as much as 50 percent of the combined purchase price of the properties.
- Balloon payments: Blanket mortgages are often structured so the borrower makes lower payments (sometimes only interest payments) for a period of time, followed by a larger lump-sum payoff. This type of arrangement tends to be offered to borrowers with excellent credit and considerable assets, but it still could come at an awkward time, especially if it’s not feasible to refinance when the lump sum is due.
- Foreclosure risk: Since the entire real estate portfolio is pledged as collateral, the borrower runs the risk of losing all their properties if they default on the loan.
How to get a blanket mortgage
If you’ve decided that a blanket mortgage might be a good fit for your commercial portfolio, you’ll need to apply — but be aware that the process of applying for a blanket loan is different than applying for an ordinary home mortgage. Here are the steps you need to take to apply for a blanket loan:
- Find a suitable lender. Most Main Street banks and credit unions don’t offer blanket mortgages. You most likely will have to seek out a commercial lender — one that deals in financing for businesses or investments. Certain mortgage brokers specialize in this lending as well.
- Check rates and terms. Since blanket loans can come with higher origination fees, down payments and other costs than ordinary home loans. Comparison-shopping is crucial, to get a sense of what’s standard and what may be out of line.
- Verify each lender’s borrower requirements. As with any loan, you need to have a minimum credit score and maximum debt-to-income ratio (DTI) to qualify for a blanket mortgage, but the bar may be higher. Also, bear in mind your business finances, as well as your personal ones, will be under review (the lender will probably look at your company’s credit rating and debt-service coverage ratio (DSCR), minimum).
- Fill out your application. It’s a good idea to gather all of your business documentation (credit reports, tax returns, financial statements) ahead of time. The lender will also want to see details on all the properties you want to finance, including their fair market value, any renovation/remodeling plans you have for them and — as with most investment properties — the figures on the rental/lease income they generate.
How to find a blanket mortgage lender
Lenders who specialize in blanket mortgages are not as commonplace as those offering other types of home loans. “Blanket mortgages do not have blanket availability,” as McBride puts it. “You’ll have to do some digging to find lenders and mortgage brokers that work with borrowers on this type of loan.” Oftentimes, Mc Bride adds, a borrower will be able to obtain a blanket mortgage from a bank or lender that does a lot of commercial real estate lending. These types of financiers are more likely to offer blanket loans as part of their product lineup.
Bottom line on blanket mortgages
For would-be homebuyers or individuals with a single rental property, a blanket mortgage might be an unnecessarily complex product for their lending needs. But for sophisticated real estate investors and developers, a blanket mortgage can be a straightforward, streamlined method to manage the finances of a commercial portfolio.
These loans are targeted to companies that invest in and develop real estate, so you’ll find sources among the ranks of commercial- or business-oriented lenders. Naturally, you should still shop around, taking note of each lender’s rates, fees and down payment requirements.