Are you someone who buys investment properties and also feels overwhelmed with your mortgage options?
Have you heard of a blanket mortgage are wondering if it's a good choice? What even is a blanket mortgage?
If you want to earn money investing in real estate, then it’s a good idea to know what’s out there in terms of mortgage loans and understand the best options for your real estate portfolio.
While it may not be easy to dive headfirst into all of the different mortgage options, let’s take a look at a popular option for investors and consumers alike – the blanket mortgage.
What Is a Blanket Mortgage?
A blanket mortgage is a single mortgage that covers two or more pieces of real estate. The real estate is held collectively as collateral, but often the individual properties may be sold without retiring the entire mortgage. It’s a good alternative that can be used to finance the purchase of multiple properties – especially for real estate investors, flippers, and developers.
In some cases, consumers might consider a blanket mortgage in order to finance a new home’s construction. This would work if you currently own a home and are looking to build a new one. The blanket mortgage would allow you to cover your new home’s down payment and closing costs so you can go ahead and start building before your previous home sells.
Who Would Benefit From a Blanket Mortgage?
A blanket mortgage can be used to finance the purchase of multiple properties. Also referred to as blanket loans, let’s look at how they’re beneficial in different scenarios.
Here Are Scenarios When A Blanket Mortgage Is Beneficial:
- Buying large or small tracts of land for real estate development.
A real estate developer might plan to purchase land, develop, and sell it. A developer may also acquire established properties that he intends to sell in individual parts.
Investors looking to build a portfolio of investment properties may wonder how to get a loan for multiple properties at once. Conventional loans such as Fannie Mae and Freddie Mac only allow you to purchase a maximum of 10 properties – one at a time.
Those who invest in commercial real estate and/or residential properties such as apartment buildings or multifamily homes can benefit greatly from blanket mortgages.
A developer can save on various costs associated with applying for, and closing on, multiple mortgages. We aren’t necessarily only talking about big business here! It can be as simple as two rental properties.
- Buying properties to flip them.
A real estate flipper is someone who identifies properties they want to acquire, refurbishes them, and puts them back on the market to sell for a profit. Flippers need to be able to act quickly in order to take advantage of opportunities they see in the market.
When buying multiple properties to fix and flip, some mortgages have a partial release clause within the blanket loan that allows you to release individual properties held as collateral (when you sell them) without having to pay the entire loan balance off. This gives flexibility to flippers and is why a blanket mortgage can be beneficial to them.
- Buying multiple locations for a business.
Some businesses have several locations they want to own and operate out of. Blanket mortgages would be a good option here.
Are Blanket Mortgages Expensive?
For a blanket mortgage loan, lenders typically require a minimum of a $75,000 loan with terms ranging from 2 to 30 years. The rates for these loans can range anywhere between 4% to 11%, and a balloon payment may be required within 3 to 15 years.
Loan origination fees for a blanket mortgage can range from 1% to 3% of the loan amount.
Unlike other loans with small down payments, the minimum down payment for this type of loan is usually 25% of the loan amount. Depending on the size of the loan and type of property, you could be required to put down as much as 50%.
Two Factors That Affect The Cost of a Blanket Mortgage
Some factors that affect the costs of blanket mortgages are the property type and property status.
The lender will require a down payment and charge an interest rate based on the risks associated with the property type.
The term "property status" is used only in blanket lending. The property can be in the new development phase, meaning it’s just a vacant piece of land, or it can be in the middle of being developed. This is what is meant by "property status".
Who Can Qualify For a Blanket Mortgage?
Blanket mortgages can be used by individuals, partners, corporations, and non-profit organizations.
If you’re a real estate investor who has conventional financing on your rental property and plan on buying more properties, then you might want to go with a blanket mortgage.
If you plan to pay off your existing conventional mortgage and buy more properties with a blanket mortgage, then you’ll need to finance it in the name of a corporation or a partnership.
Advantages and Disadvantages of Blanket Mortgages
There are pro's and con's of every mortgage type, and a blanket mortgage is no different.
Advantages of a Blanket Mortgage:
- More Cash On Hand. One of the main advantages of taking out a blanket mortgage is that it allows the borrower to have more cash on hand. This can be helpful when looking to finance a new property, enter a new investment venture, or repair an existing property.
- Only Have to Pay One Set of Mortgage Fees. A property owner only has to pay one set of fees for the loan rather than separate fees on each property.
- Better Interest Rates. Better interest rates can also be negotiated with a blanket mortgage. This can also free up money in the form of lower monthly payments.
- Less Time Spent Applying For Multiple Mortgages. The mortgage application process has a reputation of being tedious and time-consuming. Applying for multiple loans at once is an extensive process that can be avoided with a blanket mortgage.
Disadvantages of a Blanket Mortgage:
- Large Down Payment. There is usually a larger down payment required with blanket mortgages.
- Tougher Mortgage Terms. The terms of the loan can also be different than traditional loans. For example, lenders may require the borrower to make a balloon payment. A balloon payment means you will have to pay off the entire loan within a certain period of time.
- Defaulting Could Affect All of Your Properties. If the owner/borrower defaults on one property, it may impact the entire set of properties covered by the mortgage. This is because one property serves as collateral for the others. This is a situation for the partial release clause mentioned above.
Should You Get A Blanket Mortgage?
Blanket mortgages typically come from non-bank lenders. In smaller markets, they may be hard to find. Look for commercial-focused lenders in your area as these are most likely used by experienced investors and commercial buyers.
If you are looking to purchase several properties at once, ease the mortgage loan process, and get more access to your equity, then a blanket mortgage may be the right option for you. However, make sure you are aware of the elevated risk of defaulting on your loan since your properties are bound together.