By Jim AkinWhat Is a Blanket Mortgage?
Blanket mortgages are sophisticated financial arrangements used to finance multiple properties with a single loan. They are sometimes used to refinance several separate mortgages held on individual properties, and are popular with real estate investors and developers who regularly buy and sell many properties.
Who Are Blanket Mortgages For?
Blanket mortgages aren't intended for the average homebuyer or even for purchasers of individual commercial or income-generating properties. They are most appropriate for:
- Real estate investors: If you have or seek to own a portfolio of income-generating properties and plan to sell off and acquire new properties periodically, a blanket mortgage can make that process easier.
- Property developers and builders: A blanket mortgage can be a great tool for individuals or companies that cyclically acquire real estate parcels, build or refurbish properties on them and then sell them.
- House flippers: A blanket mortgage can provide open-ended financing that enables opportunistic purchases of distressed homes at auction or in a preforeclosure. After a fixer-upper has been refurbished and sold, this type of mortgage simplifies the financing of the next project.
- Businesses with multiple outlets: Restaurant franchisees, retailers and other companies that operate (or plan to operate) in several locations may use blanket mortgages to finance expansion sites.
Pros and Cons of Blanket Mortgages
Blanket mortgages can create significant opportunities for borrowers, but they also carry steep costs and significant risk. Here's a breakdown of the pros and cons.
Pros
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Lower borrowing costs: If you qualify for a blanket mortgage, you'll likely be offered a comparatively low interest rate, and you could save on fees and other closing costs you could expect to pay if you took out separate loans on each individual property.
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Administrative convenience: Having a single loan payment for multiple properties simplifies bill-paying, and having a single point of contact for all your real estate financing can simplify loan-servicing issues.
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Flexibility: Unlike conventional single-home mortgages, which require you to repay the loan when you sell the financed property, blanket mortgages typically include a release clause that keeps the loan open if one subject property is sold. In that event, the borrower need only repay the outstanding balance on the sold property. In many instances, the borrower can then use the blanket mortgage, along with proceeds from the sale, to finance another property.
Cons
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High upfront costs: While conventional single-family mortgages typically call for a 20% down payment (or less if you purchase mortgage insurance), blanket mortgages can require down payments of 25% and even as much as 50% on each property. And while the closing costs on a blanket mortgage are less than the total you'd pay if you took out separate loans for each property, they're higher than those you'd pay on a single-property mortgage.
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Risk: Properties financed through a blanket mortgage are collective collateral on the loan. So, if a cash crunch forces you to miss enough loan payments, the lender could foreclose on one or all of the properties, depending on local laws and the outstanding balance on the loan.
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Balloon payments: Some blanket mortgages call for the borrower to make substantial cash payment at the end of the loan term, called a balloon payment. If applicable to you, it's important to plan ahead so you have funds on hand when the time comes.
How to Get a Blanket Mortgage
Here's a breakdown of the process required to get a blanket mortgage.
- Find a lender. Blanket mortgages are specialized loans, and they aren't available from every mortgage lender. Ask for referrals from area real estate professionals or attorneys, or consider engaging a mortgage broker.
- Satisfy eligibility requirements. Qualifying for a blanket loan is a higher hurdle than you'll find with traditional single-property mortgages. The complexity of financing multiple properties requires more paperwork than a single-property loan. Each property typically requires its own appraisal, for instance. Lenders will look at your credit scores and also may require you to show that you have experience handling multiple properties and real estate transactions before they are comfortable offering you a blanket mortgage.
- Negotiate terms. You won't likely find blanket mortgage lenders advertising their offerings' interest rate and fees like how single-family mortgages are often promoted. The borrowing terms on a blanket mortgage aren't standardized and are a function of the number of properties involved and their market values, as well as your credit score and financial picture. Your level of experience managing real estate investment portfolios may also be a factor. Based on all these variables, you and your lender (along with your real estate attorney or other advisers) will determine the terms they'll offer you.
- Pay closing costs. The required down payment on a blanket mortgage can range from 25% to as much as 50% of the value of all financed properties. Origination fees will likely be lower than the sum of all you'd pay if you took out separate loans on each covered property, but they could be higher than you'd pay on any single-property loan. Closing costs related to professional services (such as legal fees, appraisals and inspections) may be a function of the number and type of properties involved, and also may be greater than you'd expect on a single-property loan. In short, you'll need access to a sizable sum of cash at closing.
Frequently Asked Questions
The Bottom Line
A blanket mortgage is a sophisticated loan that offers great flexibility for real estate investors, but it comes with stiff eligibility requirements, high upfront costs and considerable risk. If you're in the market for a blanket mortgage—or any other loan—checking your FICO® ScoreΘ for free through Experian can help you know how lenders are likely to view your creditworthiness.
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About the author
Jim Akin
Jim Akin is freelance writer based in Connecticut. With experience as both a journalist and a marketing professional, his most recent focus has been in the area of consumer finance and credit scoring.
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