Complete Guide on Blanket Mortgages
What You Should Know
- A blanket mortgage is a type of mortgage that covers more than one property.
- Blanket mortgages are popular among real estate investors because they offer a lower interest rate and are easier to qualify for than traditional mortgages.
- You can purchase multiple properties or refinance several mortgages into one blanket loan.
- Qualifying for a blanket mortgage typically requires a good credit score, solid income, and a substantial amount of equity in the properties being mortgaged.
A blanket mortgage is a type of mortgage that covers more than one property. Blanket mortgages are popular among commercial real estate investors because they offer a lower interest rate and easier management than individual conventional mortgages. They can also be used to purchase multiple properties or refinance several mortgages into one blanket loan.
This article will discuss the basics of blanket mortgages, including how they work, the benefits and drawbacks of using them, and who qualifies for them. We will also provide alternatives and tips for getting the best deal on a blanket mortgage.
What Is a Blanket Mortgage?
A blanket mortgage is a single loan that covers multiple properties, which are typically used for investment purposes. They are often used in the real estate industry to finance a portfolio of properties but can also be used for commercial and residential developments.
The key benefit of a blanket mortgage is the ability to bundle multiple properties under one financing solution, resulting in a lower interest rate and a more straightforward management process. Additionally, you will save on paying various sets of closing costs.
A blanket mortgage is a loan in which the collateral for the loan is not just one property but all properties under the mortgage umbrella. If a borrower defaults on their loan, the lender may foreclose on all the properties instead of just one. This presents a bigger risk to a borrower with a blanket loan.
Blanket mortgages can have unique characteristics. For example, your payments may be structured as a balloon mortgage. This means you'll make small monthly payments with a lump-sum repayment at the end of your term. At the end of the term, the investor can either sell the property or refinance into another loan. Typically, balloon mortgages of this nature range from three to 15 years.
Some blanket mortgage contracts may also offer a release clause. This operates as a line of credit that allows you to repay the loan and re-borrow from it as you sell individual properties. For example, imagine using a blanket loan to acquire four properties. You could sell an individual property and reuse the loan to purchase a new building. However, you must remain below maximum loan-to-value (LTV) requirements.
Benefits and Drawbacks of a Blanket Loan
| Benefits | Drawbacks |
|---|---|
| Fewer fees | Higher down payment |
| Simplified financing | Higher default risk |
| Potentially lower interest rate | Low availability |
| Release clause flexibility |
Blanket Loan Benefits
There are several benefits to using a blanket mortgage for real estate investments.
- Fewer fees: Instead of paying closing costs for multiple loans, a blanket mortgage covers them all in one transaction.
- Simplified financing: Instead of obtaining separate loans for each property, a blanket mortgage allows all properties to be financed under one loan. This can make managing finances and making payments much easier.
- Potentially lower interest rate: You may be able to negotiate a lower interest rate than traditional mortgages, providing potential savings over time.
- Release clause flexibility: The ability to pay off individual properties and reinvest in new ones can provide growth opportunities.
Blanket Loan Drawbacks
While there are many benefits to using a blanket mortgage, there are also some drawbacks.
- Higher down payment: Lenders may require a down payment ranging from 25% to 50%.
- Higher default risk: Since the collateral for the loan is multiple properties, the lender may foreclose on all the properties in the event of default instead of just one.
- Low availability: Blanket mortgages are not as common, and it may be harder to find lenders willing to offer them.
Who Qualifies for a Blanket Mortgage?
Qualifying for a blanket mortgage typically requires a good credit score, solid income, and a substantial amount of equity in the properties being mortgaged. At a minimum, you'll need the following criteria.
- 25% to 50% down payment
- Six months of cash reserves
- 1.25x debt service coverage ratio (DSCR)
Aside from this, lenders may also require that borrowers have experience investing in real estate and a track record of success. Additionally, they will pull a credit report.
Lenders may also analyze the individual properties within the blanket. They will look at each property's condition, location, and net operating income (NOI).
Blanket Loan Alternatives
If a blanket mortgage is not the right fit for your investment needs, there are some alternatives to consider.
Individual Mortgages
Instead of bundling multiple properties under one loan, obtaining individual mortgages for each property may be a good option. For example, you can receive individual DSCR loans on each property. If you can't receive a blanket release clause, this will provide more flexibility to sell or refinance individual properties without affecting others.
Portfolio Loans
Portfolio lenders don't resell their mortgage assets to free up cash like most lenders. Instead, they keep the loan on their balance sheet. As a result, they don’t have to meet conforming loan requirements. Portfolio lenders have lots of flexibility in deciding lending criteria. Some portfolio lenders offer release-clause blanket mortgages that don't require all properties to be owned by the same borrower. This allows you to spread costs with other investors. However, you'll need to ensure that the other investors have low default risk.
Commercial Line of Credit
Like a HELOC, a commercial line of credit allows borrowers to access funds needed for their investment properties rather than taking out a lump sum loan. This can provide more flexibility for financing and managing expenses.
Tips for Getting the Best Deal on a Blanket Mortgage
Blanket mortgages can be a valuable tool for real estate investors looking to finance multiple properties. However, it's essential to consider the risks and drawbacks before committing to a blanket mortgage. As with any significant financial decision, it's crucial to do your research and carefully weigh all options before making a decision.
Bottom Line
Blanket mortgages can benefit real estate investors, but it's essential to carefully consider the risks and explore all financing options before committing to a blanket mortgage. Investors can get the best deal on a blanket mortgage by shopping around, considering the collateral of the properties being mortgaged, negotiating with potential lenders, and weighing other financing options.