A Guide To Blanket Mortgages

Blanket mortgages offer a streamlined solution for acquiring and developing multiple properties under a single loan. 

They are an ideal way for developers and serious investors to limit paperwork, simplify real estate transactions, and consolidate the financial infrastructure of their portfolios. However, they also come with substantial risks, which you should understand fully before getting one. 

In this article, we’ll cover the basics of what is a blanket mortgage and how or when investors should use this sophisticated strategy. 

What is a Blanket Mortgage? 

A blanket mortgage is a single loan that covers multiple real estate properties, where the individual properties are held as collateral against one another but can still be sold while maintaining the mortgage. 

Blanket mortgages are often used to purchase and develop land that will eventually be subdivided and sold out to individual owners. These properties can be quite large, so financing them under a single loan rather than multiple real estate loans and mortgage payments is beneficial for streamlining the process. 

By consolidating their properties under one mortgage, investors can also save on costs associated with applying for and closing on multiple loans. While lenders may require a higher down payment due to the larger loan amount, using a down payment calculator (like this one from Rocket Mortgage) can help investors plan accordingly. 

Who Uses Blanket Mortgages? 

Blanket mortgages are mainly utilized by large-scale real estate developers, experienced investors, and businesses with several locations. They are suitable for both commercial and residential investors and can be used to finance multiple multifamily complexes or business developments.  

Blanket loans are also useful for house flippers who want to turn over multiple properties at once while limiting operating expenses. A blanket loan makes it possible to acquire multiple properties at once and renovate them concurrently, then resell them one by one as renovations are finished. The proceeds of each sale are then applied to the mortgage, which is maintained as properties are sold. If the flip was successful and the home sold for more than its purchase price, the flipper can keep the profits after making the associated mortgage repayment. 

Blanket mortgages are not suitable for first-time homeowners, new investors, or small landlords with only a few properties. Blanket mortgages have a more complex loan structure than typical mortgages and aren’t intended for use in small-scale single investments or for individuals with two personal residencies. 

Release Clauses 

Most blanket mortgages have release clauses, or clauses that allow an investor to maintain the mortgage if one of the properties under the “blanket” is sold or refinanced out of the blanket. In this case, the investor would not be required to pay off the entire loan, but only the portion of it associated with the property that was sold. 

Release clauses are also conducive to the real estate investing cycle. Many blanket loans allow investors to use the part of the loan that has already been paid to reinvest in another property rather than paying off the loan after they’ve sold one or more of the properties under the blanket. 

Advantages of Blanket Mortgages 

As a developer or real estate investor considering a blanket mortgage, there are many benefits that make this option an attractive financing option. 

• Savings on closing costs, including application, loan origination, and underwriting fees. Rather than getting multiple mortgages, a separate one for each property, investors using a blanket mortgage only have to go through the financing process once. This means instead of paying many separate sets of closing costs, you would just need to pay one set of closing fees. 
• Faster application and underwriting process. For the same reason as above, blanket mortgages make the financing and commercial real estate underwriting process for multiple properties faster since it only needs to be done once. 

• Simpler administration. Rather than keeping track of multiple loans, blanket mortgages consolidate everything to one loan payment, interest rate, and escrow account.  
• Potential for better interest rates. Blanket mortgages could help you secure great interest rates for multiple properties if taken advantage of at an opportune moment. 
• Smooth reinvestment process. Release clauses allow investors to continually reinvest in their portfolios after selling properties under the blanket loan. 

Disadvantages of Blanket Mortgages 

Despite the above pros, there are some considerable risks to keep in mind when dealing with a blanket mortgage. Here are a few: 

• Difficulty finding and/or getting approved for them. Because blanket mortgages are more specialized and sophisticated financing tools, not all lenders offer them. Many lenders who do offer them enforce stricter regulations due to the higher risks involved. 
• Higher closing costs. Even though blanket mortgages allow you to consolidate all your closing costs into one set, the closing costs you will pay are likely to be much higher due to the large size and complexity of the loan. 
• Higher down payments. Blanket mortgages typically have much higher down payments due to higher loan amount. 
• Defaulting on one property could put all your other properties at risk of foreclosure. This is because the properties under the blanket are used as collateral against one another. If you fall behind on one property, it could trigger effects on all your other included properties. 
• Inability to invest across state borders since different states have different rules regarding the use of blanket loans. 
• Blanket loans often have built-in balloon payments, which are lower initial payments followed by lump sum near the end of the loan term. Balloon payments can be a positive aspect since they decrease monthly payments in the initial part of the repayment period. However, they can quickly turn sour if you aren’t prepared for the larger payment later. 

How to Get a Blanket Mortgage 

If you’re a developer, flipper, business owner, or investor who has decided to pursue a blanket mortgage, be aware that the process to secure this type of loan is a little different than the process for a traditional conventional mortgage. Here is a step-by-step guide: 

1. Identify a lender who offers blanket mortgages. Identifying your lender will take some time, since most lenders do not offer blanket mortgages. Blanket loans are most likely to be offered by large, commercial lenders. To identify your best options, try asking around in local investment groups or see if your current lender has useful information or suggestions. 
2. Compare interest rates and requirements. This step differs very little from a traditional mortgage. After identifying a few lender options, perform a careful comparative analysis to decide which lender offers the best loan for your purposes. 
3. Apply for the loan, preferably with the help of a real estate professional who can guide you through the mortgage lending process, including getting a property appraisal for each property under the blanket.
4. Complete the qualification/underwriting process. Real estate underwriting is the process performed by a real estate underwriter to evaluate the risk of extending a mortgage loan to someone, usually including income verification, employment history, a credit report, and a review of the applicant’s assets and debts. Depending on your background and operations, it may be difficult to qualify for a blanket mortgage. Large commercial real estate companies and/or experienced investors with sizable, successful portfolios and on-hand cash are most likely to get approved for blanket mortgages. Blanket mortgage lenders will also look for the typical qualifying factors, like a high credit score and low debt-to-income ratio (DTI). The lender may also inquire into your company’s debt-service coverage ratio (DSCR). 
5. Negotiate rates, contingencies, and other terms. If approved for the loan through the real estate underwriting process, the next step is to negotiate with your sellers and lenders to establish rates, contingencies, and terms that are agreeable to all parties. 
6. Pay the down payment and closing costs. Remember that closing costs for a blanket mortgage are likely to be higher despite being consolidated. 
7. Close on your properties. After receiving the loan, you can now officially close on your properties and move on to the next step in your investing journey, whether that be flipping, finding tenants, or setting up your business properties. 

Conclusion 

Blanket mortgages can be a valuable tool for real estate investors, developers, and business owners looking to substantially expand their portfolios. By covering multiple properties under a single loan, blanket mortgages streamline the acquisition and development process. 

However, while this financing tool comes with advantages like convenience and cost savings, it’s important to be aware of the potential risks involved. Understanding how blanket mortgages work and who they’re best suited for can help you make informed decisions in your real estate ventures.