What is a blanket mortgage?
According to The Mortgage Reports, “blanket mortgage” is not a term that everyone in the real estate industry would recognize.
It is a type of loan that finances multiple properties at once (provides a blanket of coverage) — used most often by professionals like commercial landlords, property developers, and construction companies.
A blanket mortgage is beneficial to these borrowers because they get coverage for all their investment properties, and only have to pay one set of origination fees and closing costs.
If you sell one of the properties that was included under the original blanket mortgage agreement, you might have to pay back (or retire) the portion of the mortgage the sold property represents, but you shouldn’t have to refinance the whole loan.
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Before you apply for a blanket mortgage
As you may imagine, blanket mortgages are typically for borrowers within a certain income bracket. But, no matter your income, before you consider applying for a blanket mortgage, there are other factors that potential lenders will consider.
Blanket mortgage candidate requirements
Generally speaking, in order to qualify for a blanket mortgage, applicants will have to provide their personal credit score, employment history, and proof of income.
Prepare to show the lender that you can handle at least six months of expenses, and that you have a down payment for the mortgage of anywhere between 25%-60%.
If you are applying as a business, you’ll need the same credit and proof of income for the company.
Each qualifying business should aim to have a debt service coverage ratio of 1.25%. You can consider "debt service coverage ratio" to be a financial health report card for your company.
You’ll also need to provide information and records on the properties you hope will be covered under the blanket loan, as well as proof of your own work experience.
Borrowing a blanket mortgage
According to Forbes, most lenders offer blanket mortgages worth 75–80% of the loan-to-value ratio (75-80% of the appraised market value of the property).
The amount of a blanket mortgage can range between the minimum of $100,000, and go as high as $100 million.
Terms are often between two and 30 years.
Their amortization periods, or the amount of time it’ll take you to pay back both the principal amount of the loan plus the interest it cost you to borrow, are 15, 20, or 30 years.
Interest rates are typically low, usually around 4%, and the balloon payments are often three, five, 10 or 15 years.
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Blanket mortgage pros and cons
Because blanket mortgages are typically expensive and represent millions of dollars between its properties and its loans, the pros and cons of borrowing them can be equally as dramatic.
- It’s convenient.
- While you may own several properties, because you have one mortgage policy covering all of them, you only have to make one monthly mortgage payment.
- The loan doesn’t limit the amount of properties it will cover.
- You only pay origination fees and closing costs once.
- It’s simpler than navigating multiple loans with multiple payments, interest rates, and other associated fees.
- It gives you more leverage if you want to keep buying properties. Lenders will see that you qualified for a blanket mortgage in the past, and were on time with your payments, which will give you credibility for future loans.
- They are rare. Given the price tags and risks involved, lenders that offer blanket mortgages may be few and far between.
- Higher monthly payments. Because blanket mortgages are loans of substantially bigger amounts of money, you’ll pay a lot per month.
- The qualifying requirements are more strict.
- If you default on the loan, you could lose your collateral.
- Depending on whether you negotiated an exit clause, a blanket mortgage could make it difficult for you to sell or flip one of your properties.
Blanket loan vs. bridge loan
Beside the fact that both blanket loans and bridge loans are mortgages and start with the letter “b,” there isn’t much other similarity between them.
Chase Bank defines a bridge loan as a “short term loan” designed to fill the gap between selling your current home and buying your future one. According to Chase, it often provides the borrower with the cash they need for closing costs.
They function similarly to other loans, in that qualified applicants need to have the lender’s minimum credit score, debt-to-income ratio (DTI), and a good share of equity in their current home.
You have a bridge loan for about a year before you start repaying the principal.
Bridge loans provide quick financing for the borrower, and if you have the funds for a 20% down payment, you can avoid private mortgage insurance (PMI). But the higher interest rates lenders typically charge on them can be a drawback, if they’re not anticipated.
Partial release clause vs. due-on-sale clause
When you’re researching blanket mortgages, you will often read about partial release clauses and due-on-sale clauses.
A partial release clause is when certain properties, or land, covered under the blanket mortgage are released once you’ve repaid a significant part of it.
A due-on-sale clause is when the borrower has to repay the full amount of the loan back to the lender if a property is sold.
Who offers blanket mortgages?
Because blanket mortgages are considered “high-end financing,” not every bank offers them. Typically, most developers who need a blanket mortgage will need to visit a commercial lender in order to apply for that type of loan.
In April 2023, the Federal Reserve Bank of St Louis estimated that commercial lenders had provided their clients with $2.8 billion in loans.
According to the Federal Deposit Insurance Corporation (FDIC), as of 2022 there were a total of 4,135 insured commercial lenders.
Is a blanket mortgage risky?
Yes, a blanket mortgage is definitely considered risky. The risk for you is because you are staking your loan with the properties you’re buying, there’s a chance that you will lose your investment if you default on your payments.
Given the amount of money blanket mortgages usually loan out, there is also significant risk for the lender, which they try to mitigate by making the qualifying requirements as strict as possible.
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