What is a blanket mortgage and does it make sense?

A blanket mortgage is useful for real estate investors with a large real estate portfolio. Also called a blanket loan, the mortgage consolidates several different loans into a single mortgage. For many experienced investors, having one loan payment makes multiple mortgage payments and interest rates much simpler.

However, arranging a comprehensive mortgage loan is not always the best financing option. For example, securing a loan is difficult. And putting individual mortgages under one “blanket” could put all the assets in the portfolio at risk.

When does it make financial sense to consolidate different mortgage loans into a single loan? Are there situations when it is best to keep individual loans separate and not consolidate them into one whole mortgage?

This article explores the pros and cons of using blanket loan refinancing to manage multiple properties in a real estate portfolio.

blanket mortgage definition

Also called a portfolio loan, a blanket mortgage is a single loan covering two or more properties. The simplified process lets you make one monthly payment for the entire loan, which means multiple properties are easier to manage. Additionally, you can buy, hold or sell assets without triggering the due-on-sale clause.

There are some nuances of a blanket loan not associated with a traditional mortgage.

For example, mortgages have a release clause, which allows you to sell a property without paying back the loan. Additionally, the blanket mortgage lender attaches a lien against each property covered by the loan. Therefore, defaulting on the mortgage can result in foreclosure on all of the property secured by the loan.

blanket mortgage pros

Knowing the advantages and disadvantages of a blank mortgage can help you make smart real estate investment choices. Let’s look at four reasons why consolidating multiple mortgages can make financial sense.

Blanket loan paperwork made easy

An attractive feature of blanket mortgage loans is their simplicity. There is no lengthy loan application process every time you decide to buy an investment property. The blanket loan application process involves only a credit check and asset verification. And when you sell an asset, the release clause allows you to make partial repayments.

Of course, keeping track of one monthly mortgage payment is easier than managing several.

Better negotiation of loan terms

A positive aspect of a blanket loan is that you have the opportunity to negotiate better interest rates and terms. For example, let’s say you must take out five or six conventional mortgages. In that case, you have little negotiating power with the lender. However, the combined amount looks more attractive to a lender.

Another advantage is that you only have one interest rate to deal with. In addition, lenders typically offer more favorable interest rates to investors who want to consolidate conventional mortgages into larger loans.

release more cash to invest

Negotiating better loan terms and interest rates means one thing – you have more cash to invest. Here are some ways how a blanket mortgage can give you more money to invest:

• low origination fee
• low closing costs
• Your combined monthly payments are lower due to lower interest rates
• It is not necessary to find a large down payment to finance a new real estate purchase.
• Make partial payments when selling an investment property

Tap into Equity to Avoid Down Payment

Do you want to buy real estate with no money down? If so, a blanket loan makes it possible. When buying a property with a blanket mortgage, you don’t need to make a down payment – ​​typically 20% for real estate investors. Instead, you offer equity from existing assets as collateral.

blanket mortgage cons

Despite their advantages, blanket mortgages may not always be the best option. Here are some of the disadvantages of consolidating multiple loans into one in real estate investing.

higher down payment

The down payment to secure a blanket mortgage is much higher than a regular mortgage. This is because lenders take more financial risk with these consolidated loans and require more cash before funding the loan. Even if the percentage is the same, the down payment will be larger.

Some real estate investors use short-term loans or swing loans to secure a mortgage. Therefore, there are more financial obligations with a blanket loan.

All properties are collateral

A serious consideration of a blanket-type mortgage is that all blanket loan assets are collateral. Therefore, defaulting on a single payment can put your entire real estate portfolio at risk. On the other hand, you only run the risk of losing a property if you have a conventional loan on the same property and you miss payments.

loan terms are short

It is not uncommon for blanket real estate loans to be amortized over ten to 15 years, as opposed to the typical 30 years for a traditional home loan. Additionally, some “portfolio lenders” structure the loan with balloon payments. This requires that you pay off the entire mortgage at the end of the term.

It’s good to remember that blanket mortgages are always short-term loans.

more stringent requirements to qualify

Fewer lenders offer blanket mortgage loans, and they are harder to qualify for. You need to have an excellent credit score and large cash reserves to make the down payment – ​​sometimes up to 50% of the loan value. Refinancing multiple loans into one also requires a higher loan-to-value (LTV).

Guidelines for blanket loans vary from state to state.

Each state has its own blanket real estate loan rules. Therefore, if you hold real estate investments in two or more states, you will need a separate blanket loan for each state.

Example of a blanket mortgage

Here are some examples of how real estate investors can use a blanket mortgage to grow their businesses and expand their portfolios.

Buying an Entire Portfolio: Let’s say you want to buy an entire real estate portfolio of properties. Then, instead of taking out separate mortgages for each property, you can find a lender that offers a “portfolio mortgage.”

Loans for Buy-a-Hold Investors: Let’s say an investor has a conventional mortgage loan on a property valued at $170,000 with a $70,000 mortgage. However, the investor decides to buy another investment property for $170,000. Instead of coming up with a 20% down payment of $34,000, they take out a blanket loan using the equity from the existing property.

Home Shifter Investors: A house flipper can buy multiple rehab properties in a single blanket loan. After flipping the house, they only have to make partial repayments when they sell each property. They can then buy another fixer-upper under the blanket loan.

how to get a blanket mortgage

Blanket pledging can be difficult for startup investors. Commercial lenders typically provide blanket loans to experienced investors with plenty of cash, large assets and a solid investment portfolio.

Here are some facts to remember when considering consolidating multiple mortgages into one:

• You usually need a 25-50% down payment.
• You must have cash reserves to cover the interest and payments on the loan for six months.
• All assets secured by the loan are at risk of foreclosure if you default on the payment

How to find blanket mortgage lenders

Traditional mortgage lenders do not offer blanket mortgages. Hence, you must look for commercial lending brokers and bankers for the loan. Look for lenders who specialize in real estate investing. However, some local community banks may offer blanket mortgages to real estate developers and investors.

conclusion

While a blanket mortgage is not for every investor, it is a useful type of financing tool for investors with multiple properties in their portfolios. Blanket loans provide greater access to funding through cash-out refinances and equity loans, and require only one monthly payment. However, the loans are difficult to secure, and they put all real estate assets in the portfolio at risk if you default on mortgage payments.

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.