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Blanket Mortgage Basics: What It Is and When to Use One
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If you’re thinking of building an investment property portfolio, you’re probably crunching numbers to keep closing costs to a minimum. A blanket mortgage can save you thousands in fees by allowing you to finance several properties at the same time, rather than one mortgage at a time.
In this article, we’ll cover:
- What is a blanket mortgage?
- When should you get a blanket mortgage?
- How much does a blanket loan cost?
- Pros and cons of using a blanket mortgage
- Where do I find blanket mortgage lenders?
What is a blanket mortgage?
A blanket mortgage is a loan secured by more than one parcel of real estate. Blanket financing can be used for several pieces of land in different phases of home development, or it could be as simple as a mortgage across two rental properties.
A blanket mortgage loan requires just one full credit approval to purchase multiple properties. Blanket mortgages can be used to purchase or refinance several properties at once.
When should you get a blanket mortgage?
Blanket mortgages are typically used to buy parcels of land for home development, but there are other scenarios when they can be useful.
Pay off conventional loans on rental properties. Real estate investors building a portfolio of investment properties may wonder how to get a loan for multiple properties at once. Conventional loans through Fannie Mae and Freddie Mac allow you to purchase a maximum of 10 rental properties — one loan at a time. A blanket loan allows you to refinance several rental homes at once, so you can buy additional homes under conventional guidelines in the future.
Buy multiple properties to fix and flip. If you’re looking to buy vacant homes in need of renovation, blanket financing can help you do that. A partial release clause within a blanket loan allows you to release individual properties held as collateral by the blanket mortgage without having to pay the entire loan balance off.
Buy large tracts of land for real estate development. Small or large home developments can be financed with a blanket mortgage. A partial release clause allows homes to be sold as they are built without having to pay off the entire loan balance.
How much does a blanket loan cost?
Blanket mortgage lenders usually won’t lend less than $75,000, with terms ranging from two to 30 years, and rates ranging from 4% to 11%, according to our analysis of several blanket loan lenders. A balloon payment may be required within three to 15 years. Loan origination fees can range from 1% to 3% of the loan amount, but those are negotiable.
Minimum down payments are typically 25% of the loan amount, but depending on the size of the loan and type of property, you might be required to put up to 50% down. Here are some factors that affect the costs of a blanket loan:
Property type. There’s really no limit on the types of real estate that can be financed by a blanket mortgage. The lender will require a down payment and charge an interest rate related to the risks associated with the property type.
Property status. This term is unique to blanket lending. The property could be a parcel of land for new development, or it could be in the middle of being developed. Subdivisions at risk of foreclosure can be financed to pay off debtors and complete the homebuilding phase.
Borrower. Blanket loans can be made to many entities: individuals, partners, corporations and even a nonprofit organization, among others. To pay off existing conventional loans to buy more Fannie Mae-financed homes in the future, you’ll need to finance the blanket loan in the name of a corporation or partnership instead of individually, which you would normally do for conventional financing on a rental property.
Appraisal fees may be higher. Appraisal fees are usually determined by the number of units being financed or the complexity of the property.
Pros and cons of using a blanket mortgage
Blanket loans come with benefits as well as disadvantages. Let’s explore the main blanket loan pros and cons.
- Only one loan to process. Rather than getting approved for multiple properties and providing loan paperwork for each property purchased, a blanket mortgage loan requires one credit package approval.
- Gain access to the equity of multiple properties. If you have several properties with significant equity and want to renovate or purchase new properties, a blanket loan gives you access to the combined equity.
- Pay off conventional financing for future conventional purchases. If you already have 10 financed properties but want a few more, a blanket loan can pay off the current loans. That gives you room to buy additional properties under conventional guidelines in the future.
- Only one payment to make. Managing the monthly payments on several investment property mortgages can be time-consuming and requires extra attention to detail if loans are sold to different loan servicers, as is often the case with loans on individual properties. With a blanket loan, you make one payment for a loan that can cover an unlimited number of properties.
- Higher down payment requirements. Depending on the property type, status and type of borrower you are, the down payment requirements might be much higher than conventional rental property financing.
- Terms may include balloon payments and prepayment penalties. A balloon payment requires payment of the entire balance within a set time period that may range from three to 15 years. Prepayment penalties may be applicable, but some lenders reduce the penalty fee as time goes on.
- Risk of default on all properties. If you default on a blanket loan, all of the properties financed by the loan are at risk of foreclosure.
Where do I find blanket mortgage lenders?
Blanket loan lenders usually offer their mortgage products through local mortgage brokers or mortgage bankers. Institutional banks may offer blanket loan products if you have a high net worth or already have an existing banking relationship with them.
Be sure you give accurate information to each mortgage company you shop with for a blanket loan. Rate and fee quotes can change if any of the criteria about the property type, status or borrower type change once the lender actually inspects the property.