Key Takeaways
- A blanket mortgage is a single loan that covers multiple properties, allowing the sale of individual properties without paying off the entire loan.
- Commonly used by developers and investors, blanket mortgages simplify acquiring and developing multiple properties.
- These loans can reduce costs such as closing fees but may require higher down payments or balloon payments.
- Investors benefit by having more liquid capital for further investments due to the streamlined financing process.
- The primary risk includes the possibility of default impacting all properties under the blanket mortgage.
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A blanket mortgage is a single mortgage that covers two or more pieces of real estate. The real estate is held together as collateral, but the individual properties may be sold without retiring the entire mortgage. Blanket mortgages are commonly used by developers, real estate investors, and flippers.
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 together as collateral on the mortgage, but the individual pieces of real estate may be sold without retiring the entire mortgage.
Blanket mortgages make it easier to get financing for multiple properties rather than having to take out numerous mortgages.
Who Benefits From a Blanket Mortgages
A blanket mortgage is a useful option for developers, real estate investors, and flippers. Blanket mortgages, which are also referred to as blanket loans, typically cover the costs of purchasing and developing land that borrowers plan to subdivide into individual lots. In many cases, borrowers acquire properties within a large purchase they intend to sell in separate parts.
For example, flippers may seek blanket mortgages as a way to act quickly and take advantage of opportunities they see in the market. If the investor identifies multiple properties they want to acquire, refurbish, and put back on the market, a blanket mortgage could offer more leeway for such actions.
The clauses of such a mortgage allow reselling the properties as new buyers come forward individually. Depending on the terms of the blanket mortgage, it may or may not be necessary to refinance the loan when separate properties are sold.
Businesses with multiple locations also may seek blanket mortgages. This could apply to real estate developers who invest in commercial or residential property, such as apartment buildings or multifamily homes.
Important
Most blanket mortgages come with a release clause, freeing the borrower from the portion of the loan that has been paid. So when the borrower sells a piece of property covered under the loan, they can use the funds to purchase another property. This is common for developers who develop land and build and sell new homes. Once the homes are sold to the public, the developers can use the money to purchase new plots of land rather than pay down the loan.
Pros and Cons of a Blanket Mortgage
Pros
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Save on closing costs
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Better rates
Cons
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Higher down payments
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Balloon payments
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Default impact
Pros Explained
- Save on closing costs: A blanket mortgage allows the borrower to have more cash on hand by saving on various costs associated with applying for and closing on multiple mortgages. The property owner needs to pay one set of fees for the blanket mortgage rather than separate fees on each property.
- Better rates: The aggregate blanket mortgage also may take advantage of better interest rates or simply be negotiated to offer more favorable terms than having to pay separately negotiated loans. This could free up more capital if it reduces the size of monthly payments, which in turn could offer them more resources to purchase more property.
Cons Explained
- Higher down payments: Some costs tend to be higher than a traditional mortgage. Since the loan amount may be higher—because of the number of properties involved—the lender may require a higher down payment to secure financing.
- Balloon payments: The terms of the loan also tend to be different from traditional mortgage loans. Lenders may require the borrower to make a balloon payment. That is, they may have to pay off the entire loan within a certain period of time.
- Default impact: If the owner defaults on one property, the impact may trigger a situation that allows the lender to seek control of the entire set of properties covered by the mortgage.
Who Should Use a Blanket Mortgage?
Real estate investors or developers or anyone else buying multiple properties at once might consider a blanket mortgage. If you have a business with multiple properties, a blanket mortgage might also be worthwhile.
What Does it Mean to Flip a Property?
Buying a property, renovating it, then selling it at a profit is considered flipping a property. Developers might do this by targeting properties they can buy cheap because of damage. After making repairs, they will sell the property for more than the combined cost of what they spent on the property and its repairs.
What Is a Balloon Payment?
A single, large payment due at the end of a loan is considered a balloon payment. As an example, a loan might have low payments for a specified period of time before the entire balance comes due at some predetermined date in the future. This kind of loan might make sense for a developer who plans to flip a house quickly and wants to keep mortgage payments low while making repairs.
The Bottom Line
Blanket mortgages cover more than a single property, but individual properties can be sold without retiring the entire mortgage. Real estate developers and investors use blanket mortgages when buying multiple properties at the same time instead of seeking individual mortgages for each property. This can save on closing costs since there is only one mortgage. The tradeoff is that blanket mortgages might require higher down payments or balloon payments.