A blanket mortgage is useful for real estate investors with a large real estate portfolio. Also called a blanket loan, the mortgage consolidates several separate loans into a single mortgage. For many experienced investors, having one loan payment makes juggling several mortgage payments and interest rates more straightforward.
However, arranging a blanket mortgage loan is not always the best financing option. For example, loans are harder to secure. And putting individual mortgages under one “blanket” can put all properties in the portfolio at risk.
When does it make financial sense to put separate mortgage loans into a single loan? Are there situations when it is best to keep individual loans separate and not consolidate them into an entire mortgage?
This article explores the pros and cons of using blanket loan refinance to manage multiple properties in a real estate portfolio.
Definition of Blanket Mortgage
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, meaning managing multiple properties is easier. Additionally, you can buy, hold, or sell properties without triggering a due-on-sale clause.
There are a few nuances of blanket loans not associated with traditional mortgages.
For example, the mortgage has a release clause, allowing you to sell one property without having to pay off the loan. Additionally, the blanket mortgage lender attaches a lien against each property covered by the loan. Therefore, defaulting on a mortgage could result in foreclosure on all properties secured in the loan.
Blanket Mortgage Pros
Knowing the pros and cons of blank mortgages can help you make smart real estate investment choices. Let’s look at four reasons why consolidating several mortgages can make financial sense.
Blanket loans simplify paperwork
An attractive feature of blanket mortgage loans is their simplicity. There is no lengthy loan application process every time to decide to buy an investment property. The blanket loan application process involves only one credit check and asset verification. And when you sell a property, the release clause allows you to make a partial repayment.
Of course, keeping track of one monthly mortgage payment is simpler than managing several.
Better negotiating loan terms
A positive aspect of blanket loans is that you have the leverage to negotiate better interest rates and terms. For example, 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 a single interest rate to deal with. Also, 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 for investing:
- Lower origination fees
- Lower closing costs
- Your combined monthly payments are lower because of low-interest rates
- It’s not necessary to find a large down payment to finance a new real estate purchase
- Make partial repayments when selling an investment property
Tap into equity to avoid down payments
Do you want to buy real estate with no money down? If so, a blanket loan makes that possible. When buying a property with a blanket mortgage, you do not have to make a down payment — typically 20% for real estate investors. Instead, you offer equity from existing properties as collateral.
Blanket Mortgage Cons
Despite their advantages, blanket mortgages may not always be the best choice. Here are some disadvantages of consolidating several loans into a single one in real estate investing.
Higher down payments
The initial down payment to secure a blanket mortgage is significantly higher than a regular mortgage. This is because lenders are at more financial risk with these consolidated loans and require more cash upfront before financing the loan. Even if the percentage is the same, the down payment will still be larger.
Some real estate investors use short-term loans or swing loans to secure the mortgage. Therefore, there are more financial obligations with blanket loans.
All properties are collateral
A serious consideration of a blanket-type mortgage is that all the blanket loan properties are collateral. Therefore, defaulting on a single payment could put your entire real estate portfolio at risk. On the other hand, you only risk losing one asset if you have a conventional loan on a single property and miss a payment.
Loan terms are shorter
It’s not uncommon for blanket real estate loans to be amortized over ten to 15 years, unlike the typical 30 years for a traditional home loan. Additionally, some “portfolio lenders” structure the loans 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 meant to be short-term loans.
More stringent requirements to qualify
Fewer lenders offer blanket mortgage loans, and qualifying for them is harder. You must have an excellent credit score and large cash reserves to make a down payment — sometimes up to 50% of the loan value. A higher loan-to-value (LTV) is also necessary to refinance several loans into one.
Guidelines for blanket loans change from state to state
Each state has its own blanket real estate loan regulations. Therefore, if you own real estate investments in two or more states, you will need a separate blanket loan for each state.
Examples of a Blanket Mortgage
Here are a few examples of how real estate investors can use a blanket mortgage to grow their businesses and expand their portfolios.
Buying an entire portfolio: Say you want to buy an entire real estate portfolio of properties. Then, instead of taking out different mortgages for each property, you can find a lender offering “portfolio mortgages.”
Loans for buy-an-hold investors: Suppose an investor has a traditional mortgage loan on a property worth $170,000 with a $70,000 mortgage. However, the investor decides to buy another investment property for $170,000. Rather than come up with a 20% down payment of $34,000, they take out a blanket loan, using equity from the existing property.
Investors who flip houses: A house flipper can buy several rehab properties in a single blanket loan. After flipping the house, they only have to make a partial repayment when selling each property. They can then buy another fixer-upper under the blanket loan.
How to Get a Blanket Mortgage
Getting a blanket mortgage can be tricky for startup investors. Commercial lenders typically offer blanket loans to seasoned investors with plenty of cash, sizeable assets, and a solid investment portfolio.
Here are a few facts to remember when considering consolidating several mortgages into a single one:
- You typically need a 25-50% down payment.
- You must have cash reserves to cover the loan’s interest and payments for six months.
- All properties secured by the loan are at risk of foreclosure if you default on payments
How to Find Blanket Mortgage Lenders
Conventional mortgage lenders don’t offer blanket mortgages. Therefore, you should search out commercial lender 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.
While a blanket mortgage is not for every investor, it is a useful type of financing tool for investors with several properties in their portfolio. The blanket loans offer more access to funds through cash-out refinancing and equity loans, and only one monthly payment is required. However, the loans are harder to secure, and they put all real estate properties in the portfolio at risk if you default on mortgage payments.
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Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.