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You’ve probably pondered as a real estate investor or house flipper on how to expand your portfolio beyond a few homes. A blanket mortgage is one of the popular options. If you’re not familiar with this form of financing, keep reading.
We’ve put up a guide on blanket mortgages that explains what they are, how they work, and the benefits and drawbacks of using this sort of financing to expand your real estate investments.
What Is a Blanket Mortgage?
A blanket mortgage, sometimes known as a blanket loan, is essentially a single mortgage used to fund multiple real estate properties. In this instance, each investment property financed by this mortgage serves as collateral for the loan. Blanket financing is popular among investors and developers since it is typically more convenient than obtaining several mortgages.
How Do Blanket Mortgages Work?
A blanket mortgage enables borrowers to buy or hold many properties under one financing agreement. Property held in a blanket loan can be sold without triggering the mortgage’s due-on-sale provision, which requires the loan to be paid in full when a property is sold. This permits you to use the sale proceeds to buy more property.
A blanket loan is preferable to multi-property investors than individual mortgages because managing one payment is significantly easier than managing multiple mortgage payments. When a property is sold from a blanket mortgage, a lender will issue a partial mortgage release as long as the remaining property on the mortgage is worth enough to satisfy the remaining loan amount.
Let’s look at an example to help you understand. Assume you used a blanket mortgage to fund three investment properties and recently sold one. In this situation, you are no longer obligated to pay that portion of the mortgage, and there is no need to refinance the loan.
Who Should Get a Blanket Mortgage?
Blanket mortgage loans aren’t designed for persons with a primary residence and a second or investment property. Instead, it’s for persons or companies with a property portfolio. Blanket mortgages may be an attractive choice for the following groups:
- Real estate investors: If you have a portfolio of investment properties, a blanket mortgage may be an option to help you streamline your finances while also freeing up capital to buy other properties over time.
- House flippers: If you’re in the business of flipping houses, a blanket mortgage can let you buy and renovate many properties at once, then sell them once they’re finished.
- Developers and Builders: Home developers are ideal candidates for a blanket mortgage because you’re buying a lot of property and developing it all at once.
- Business Development: To open many business locations, you’ll need a lot of cash. A blanket mortgage may make this easier because it is a single financing instrument.
Are Blanket Mortgages Only Used by Real Estate Investors?
While blanket mortgages are used mainly by real estate investors and developers, firms with several locations and commercial properties can also benefit. This could imply consolidating several previous loans into a single blanket loan or employing a blanket loan to acquire several new locations in a single sweep.
>> More: What Is a Mortgage Investor?
What Are the Benefits of Blanket Mortgages?
- Less paperwork – A single mortgage means less paperwork for the borrower. You’ll also only have to prepare for one credit and employment check.
- Savings – Closing expenses typically account for 2-5 percent of a borrower’s loan amount. That’s a lot of money for most people, especially if more than one piece of real estate is involved.
- One low rate – Mortgage rates continue to be extremely low. They are, however, likely to rise as the economy improves. It is worth noting that blanket mortgage rates typically range from 4 to 11 percent.
What Are the Disadvantages of Blanket Mortgages?
- Lack of availability – Keep in mind that this loan type is unavailable from all lenders. You’ll need to look into business lenders because you’re not dealing with a regular mortgage.
- Stricter conditions – A blanket mortgage will be more challenging to qualify for than a standard house loan. Borrowers with a more significant down payment ($75,000 or more), a higher credit score, and a lower debt-to-income ratio are preferred by lenders. The length of a blanket loan might range from 2 to 30 years.
- Greater risk – There is a lot at stake with a blanket mortgage. Unfortunately, a single financial snafu could result in the foreclosure of all of your properties. The more properties you finance, the more risk you take – it’s as simple as that.
Who Offers Blanket Mortgages?
Mortgage lenders specializing in blanket mortgages are not as common as those offering other forms of loans. Commercial lenders, portfolio lenders — who keep loans on their books rather than selling them — and hard money lenders often offer blanket loans.
You’ll have to research to identify lenders and mortgage brokers who work with borrowers on this type of loan. Often, a bank or lender that performs a lot of commercial lending will have this as part of their product selection.
Bottom Line: Blanket Mortgages
Blanket financing isn’t for everyone. However, for people in need, acquiring this form of finance is easier than obtaining numerous mortgages, especially if you attempt to secure them simultaneously.
Still, if you’re considering this option, you should consult with a mortgage lender beforehand. They can assist you in determining whether or not this sort of financing is appropriate for you and the steps involved in getting one.