What is a Blanket Mortgage?
Blanket mortgage pros and cons
Blanket mortgages consolidate properties for refinancing purposes
The most basic reason why a blanket loan might be used by an investor is to consolidate multiple loans from various lenders into a single financing arrangement.
The additional properties also may be used for negotiating with lenders for better terms, and therefore to lower your monthly payment. In turn, this raises the value of your properties and increase your overall net cash flow.
Blanket mortgages obtain access to more equity
Say you would like to get funds together to make a down payment on a new investment property, or for rehabbing one that you own already. Taking your properties and pool them together under a single loan will often provide you with access to a higher cash amount than you would usually have access to.
In general, banks will not finance a loan on a lot that is not free of mortgages. It is claimed by lenders that this protects them against the possibility of a developer defaulting on the loan, and if you are a developer or builder who needs to be able to release liens on the land that are already present then that can be a problem.
However, when a property has been bundled together under a blanket loan with other lots, then a partial release provision can be utilized by the developer.
A partial release clause then gets added to the mortgage so that the lender can release one of their properties as an owner paying the mortgage down.
A loans value is assigned by the lender to each of their properties and specifies a percentage on the loan amount or sales price that has to be paid to release a property. There are numerous lenders who want to have a higher percent to lower the total outstanding debt, but often you can negotiate the percentage.
It may appear that it would make a lot more sense to just prorate the loan among the different properties and then release each of the properties whenever the amount that is received equals the loan value that has been assigned to every individual unit. However, this is not done by lenders, since they assume the appraisal amount has an amount of error in it.
That could leave them having a loan where some of the properties were released already, and the properties remaining are worth less than what the are remaining amount on the loan is.
The provision enables the lots to be financed by the developer, and the lien removed from each of the lots when they are sold, and part of the borrowed loan is received by the lender.
Blanket loan disadvantages
Hard to sell individual properties
There are disadvantages to blanket loans. It is sometimes harder as a borrower to separately refinance or sell properties. For instance, when a loan has not been structured as being a partial release and a due on sale clause exists, then selling one property could cause the whole mortgage to become due.
Blanket mortgage closing costs are high.
There are some investors that make the assumptions that the cost to finance several properties together could be less than financing them individually. However, paying a higher rate is definitely not unheard of, and most likely you will need to have a lower LTV as well. Closing costs also are high since they based not on the total loan amount but on the total number of properties.
The lender also will required all of the properties to be appraised and might also request that physical inspections be performed of all of the properties. When these are combined with title insurance and title searches, and completing any maintenance or repairs, you may end up adding a large sum to the closing costs of the loan.
Why can Blanket loans only be used in the one state?
Since guidelines on blanket loans are different in each state, a blanket loan will be needed for properties in each different state. So if own properties in Florida, New Jersey, and New York, you will need to have three blanket loans to cover all of your properties.
Blanket loan properties all serve as collateral for one another
Since all properties serve as collateral for one another, if you default on the mortgage your lender can foreclose on all of your properties to recoup their losses. Therefore, if one of your properties fails to bring you the cash flow that you were expecting, your entire portfolio could be jeopardized.
So when thins are going very well, do not start to pile deals on just because you are able to, since later on you might regret it. Rent prices can o down, especially if a major employer moves out of the local area.
Blanket loan vs Wraparound mortgage
On a wrap-around loan, the lender assumes responsibility on another mortgage.
For example, say the property has a sales price of $500,00, but there is a loan on the property already for $200,000. If $100,000 is put down as a down payment by the buyer, the lender then gives a mortgage on the $400,000 that remains. The new mortgage wraps around the current $200,000 mortgage since the new lender will be assuming responsibility for the previous mortgage.
However, a wraparound mortgage isn’t the same thing as a blanket mortgage, since wraparound mortgages are intended to cover one property’s mortgage and not several of them.
Bridge loans also are used for refinancing commercial properties and purchasing raw land that will be developed later as commercial property. However, there are two ways that bridge loans are different from blanket loans: they only cover one property and they are short-term loans.
It isn’t always easy to find blanket loans. You might have to look to credit unions or smaller banks specializing in commercial loans. Also, remember that blanket loans are not intended to be long-term loans. The lender is not likely to renew them and they are not fully amortized.
Working to refinance a blanket loan for six months in advance at least before it becomes due can enable you to take advantage of the numerous benefits while also taking advantage of the cash infusion that it provides.