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Key takeaways
- A blanket mortgage allows a borrower to buy multiple properties with one loan.
- Experienced real estate investors, developers, home flippers and businesses often use blanket mortgages to buy both commercial and residential real estate.
- Blanket mortgages often require high down payments and balloon payments.
What is a blanket mortgage?
A blanket mortgage — also called a blanket loan — is a product often used by developers, investors, house flippers and businesses to purchase multiple properties with one mortgage loan. This is different from a traditional mortgage, in which a single loan finances a single property.
“These types of loans are typically done by investors who are purchasing several lots or commercial buildings — usually within the same location or next to one another — as it’s a great way to streamline the lending process and keep your properties in one portfolio,” says Rose Krieger, senior home loan specialist for Churchill Mortgage.
“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.
How does a blanket mortgage work?
Blanket mortgages function similarly to traditional mortgages in some ways. For example, the assets covered by the mortgage serve as collateral, and the loan can be refinanced.
On the other hand, blanket mortgages can involve risky features like balloon payments. They’re designed for companies or tenured investors, not individuals.
“This is not for a newbie, mom-and-pop landlord that is looking to jump into full-scale real estate management overnight,” says Greg McBride, CFA, chief financial analyst for Bankrate.
If you are buying multiple properties, blanket loans have some advantages. “A blanket mortgage is a single loan, so you will have just one set of closing costs and one monthly mortgage payment,” Krieger says.
Blanket mortgages also typically include a feature known as a release clause. This clause allows the borrower to sell off a property covered by the loan after having paid a specified amount of the principal. The borrower can then retain the mortgage and the remaining properties.
Pros and cons of a blanket mortgage
Like other types of mortgages, blanket loans have their pros and cons. Here are the main ones.
Pros
- Lower closing costs: With a blanket mortgage, you won’t have to pay separate closing costs and fees for each loan.
- Easier administration: One loan means one interest rate, one monthly payment and one escrow account, cutting down on paperwork.
- Continuity: The release clause in a blanket mortgage can allow you to sell a collateralized property while retaining the original mortgage — with some conditions.
Cons
- More expensive closing costs: While you only have to pay one set of closing costs, a blanket mortgage’s closing costs are often higher than those for a traditional mortgage.
- Higher down payment: Blanket mortgages can require a down payment as high 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 interest-only — for a set time, followed by a larger lump-sum payoff.
- Foreclosure risk: With multiple properties used as collateral, you risk losing them all if you default on the loan.
How to get a blanket mortgage
“Blanket mortgages do not have blanket availability,” says McBride. “You’ll have to do some digging to find lenders and mortgage brokers that work with borrowers on this type of loan.”
Once you’ve found a lender — likely a commercial lender that finances businesses or investments — that offers blanket loans, here are your next steps:
- Check rates and terms. Blanket loans can come with higher origination fees. In addition, the down payment and closing costs are usually higher than those for ordinary home loans. Because of this, it’s important to comparison shop in order to get the most competitive loan terms.
- Verify each lender’s borrower requirements. As with any loan, you need to meet the minimum credit score and maximum debt-to-income (DTI) ratio threshold to qualify for a blanket mortgage — but expect the bar to be higher than for a traditional mortgage. If applicable, the lender will review your company’s credit rating and debt-service coverage ratio (DSCR) as well.
- Fill out your application. As with other types of loans, a lender will want to review your financial information, including tax returns and financial statements, and details about all the properties you want to finance. That includes their fair market value, any renovation plans and estimates of the rental or lease income they’ll generate.
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