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What Is a Blanket Mortgage?
Ready to buy a home but are confused on some of the mortgage terms? The language used to describe this process can be tricky to decipher, especially when it comes to mortgage terminology.
One term that you won’t hear as often as some of the others is blanket mortgage. A blanket mortgage may seem complicated, but it’s really just a loan used to finance two or more properties. These mortgages are common tools used by property developers and real estate investors to simplify property financing.
Blank mortgages are not generally used for owner-occupied houses and properties. In most cases, blanket mortgages are strictly for commercial purposes. Luckily, people interested in buying a home only need to worry about one piece of property, so the mortgage process is fairly straightforward. Still, it may be worthwhile to understand the ins and outs of blanket mortgages. Here’s what you should know.
What is a blanket mortgage?
Imagine if real estate developers had to take out a new mortgage every time they wanted to finance a property. It would make business costly and much less efficient, with tons of paperwork to get through. When you’re dealing with multiple mortgages as a developer, things can get confusing fast — especially if the mortgages are from multiple lenders.
That’s where blanket mortgages come in. These mortgages help cut down on the loan process for developers and investors by lumping in multiple mortgages under one financing agreement.
Commercial real estate developers and investors like blanket loans because they can finance multiple projects without having to take out multiple mortgage loans. Managing all the properties together means less paperwork and one point of contact. The financing is easier to keep track of, which means less work for the developer.
[ Read: How to Invest in Real Estate ]
Aside from making business easier, blanket mortgages have a few other unique perks for commercial developers. For example, it’s also possible to save money on mortgage-related fees by using this method of financing consolidation. Although the appraisals are generally handled separately with a blanket mortgage, many of the other costs can be handled together with a blanket loan, which often reduces the price tag for financing.
Blanket mortgages also generally include release clauses. These clauses allow properties under the mortgage to be sold individually, which means developers have a lot of flexibility to work with. Developers and investors commonly sell property in their portfolios at different times as markets become more or less favorable, so using a blanket mortgage caters to their business needs.
How are blanket mortgages different from other types of mortgages?
The most apparent difference between a blanket mortgage and a standard mortgage is what each one is used for. Blanket mortgages are for commercial use, while regular mortgages can be used for both commercial and residential purposes.
Just like traditional mortgages, blanket mortgages use the financed property as collateral for the loan. If the borrower defaults on the mortgage, the lender can take the property as payment.
Many mortgage contracts have a release clause, which commonly states that if a condition in the contract has been met — paying off a certain percentage of the mortgage, for example — then the borrower is freed from either part or all of the lender’s collateral claim on the property.
For blanket mortgages, the contracts commonly include a partial release clause. This clause generally means that after some of the mortgage is paid back, the borrower can sell individual properties under the mortgage while still maintaining the loan.
This important feature in blanket mortgage contracts gives developers more freedom to sell their properties as they see fit.
Benefits of a blanket mortgage
Real estate is a complicated business, and developers have plenty to worry about.
The main two benefits that blanket mortgages provide to people in the industry are saving money and making financing easier.
Each benefit plays out in a few different ways. Some of the benefits include:
- Reduced time and hassle during the loan process: A blanket mortgage allows developers to include multiple properties in a single financing arrangement, which reduces the time developers need to spend on handling the mortgage process for the properties.
- Cheaper loan fees: Various fees come with applying for and closing on commercial mortgages. If a developer only has to pay one set of costs for multiple loans, it could make the process of buying multiple properties less expensive.
- Better interest rates or loan terms: Blanket mortgages can also save developers money if the single blanket mortgage will have better interest rates and more favorable terms than multiple standard mortgages.
- Consolidated payments: If the developer can consolidate all the monthly payments into one payment at a lower rate, it could free up working capital to be spent on other business costs.
- Fewer lenders to deal with: Every mortgage lender has their own set of rules, and part of a developer’s job is maintaining a positive working relationship with their mortgage lender. A blanket mortgage means the developer only has to deal with one lender for multiple properties, which simplifies the month-to-month process.
[ More: 7 Crucial Steps to Buying a Home ]
Drawbacks of a blanket mortgage
Blanket mortgages create significant financial obligations for borrowers, and there are definitely downsides to taking on such a big responsibility. If a developer plans to use a blanket mortgage, they need to consider a few things first.
The downsides to a blanket mortgage include:
- Foreclosure risks: Blanket mortgages can use all the property under the mortgage as collateral. If you default on the loan, all of the properties financed with the blanket mortgage may be at risk for foreclosure.
- Higher down payments: Blanket mortgages may require higher down payments than regular mortgages, but it will depend on the property type and number of properties being financed.
- Expensive closing costs: Closing costs are generally based on the number of properties that need financing, not the total amount of the loan. If you’re financing multiple properties, the closing costs for blanket mortgages can be very expensive.
- Potential balloon payment clause: The terms of blanket mortgage contracts can include a balloon payment clause, which means the entire remaining amount of the loan could be due after a certain date. This could put a huge burden on the developer if the properties aren’t sold by that point.
- Appraisal issues: Properties are commonly appraised individually, even under blanket mortgages. If there are issues with one property, it could hold up the financing process for all of the properties the developer plans to include in the loan.
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