Most homeowners use traditional mortgages when buying their primary or vacation home. However, when you own multiple properties, it makes sense to explore other options that may be better suited to your situation. One of the strategies that real estate investors use is something called a blanket mortgage. In this article, we’ll define what a blanket mortgage is, who uses them and the pros and cons of these types of loans. Consider working with a financial advisor as you as you explore ways to finance real estate properties.
The mortgage rate environment is more volatile now than ever. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.
What Is a Blanket Mortgage?
A blanket mortgage allows you to finance multiple properties at once instead of financing each property individually. You can use a blanket loan to purchase multiple properties at once or to consolidate the loans from multiple properties into one.
In general, when you sell any of the underlying properties, only that portion of the loan comes due. The remaining balance of the loan continues as planned without the loan “being called,” which would require you to refinance or pay off the loan in full.
Most traditional banks and lenders do not offer blanket mortgages. Instead, these loans are primarily available through commercial lenders. They focus on experienced real estate investors who own multiple properties and have complicated finances. The best way to find a commercial lender that offers blanket mortgages is to get referrals from your banker, CPA or financial advisor. Additionally, speak with other real estate investors or attend local real estate investor meetings to find out which lender they use.
Who Can Benefit from a Blanket Mortgage?
These loans are not intended for your primary residence or even a vacation home. Instead, they are designed as investment properties for real estate investors who rent, flip or build homes as a business. Here are a few of the most common users of a blanket mortgage:
- Rental property investors. Investors in rental properties usually have borrowing limits through traditional lenders. A blanket loan can consolidate loans on existing rental properties into one loan or allow them to buy multiple properties at once.
- House flippers. Using a blanket loan enables house flippers to buy multiple properties at once for future sale. As each property is sold, the flipper only has to pay off that portion of the loan.
- Builders and developers. A blanket mortgage can also be used to purchase land and finance the construction of buildings. The loan turns into permanent financing if the developer decides to hold onto it or it can be paid off as buildings are sold.
- Business development. If you’re expanding your business or buying one with multiple locations, a blanket loan provides financing for all of the buildings under one mortgage.
Pros and Cons of Blanket Mortgages
Financing your properties with a blanket mortgage has its pros and cons. Consider how these situations affect your financing and investing strategy before pursuing a blanket mortgage. Note that not all of the pros and cons listed here apply to each situation so take each opportunity on its own.
Pros: Simplicity and cost
- You’ll save the time and hassle required of financing multiple properties in succession or concurrently. There’s only one set of financials, one credit inquiry and one application to complete.
- There’s only one origination fee charged by the lender. While the origination fee may be larger than what’s charged for a single-property loan, it should be less than the combined origination fees of multiple property loans.
- Once your loan is finalized, you only have one loan payment to manage and one monthly statement to update in your accounting.
- Selling one property doesn’t affect the rest of the loan. Instead, when that property sells, only that portion of the balance is due.
Cons: Availability and risks
- Blanket loans are not widely available and your current bank may not offer them. You’ll have to deal with unfamiliar lenders and processes than what you’re currently used to.
- Because the loan is larger and has more moving parts, the lender’s underwriting requirements may be more restrictive. The lender may require a higher credit score and lower debt-to-income ratio to approve your loan.
- Many blanket mortgage lenders require a larger down payment of 25% to 50%, which may be tough for some borrowers.
- When you have individual loans for each property, if your finances become a challenge, you can miss payments or default strategically on individual properties. With a blanket mortgage, if you cannot make the full payment that can affect every property included in that loan.
The Bottom Line
If you’re a real estate investor, consider using a blanket mortgage to finance your properties. They may not be right for every situation, but you can save time and money when using this type of financing instead of individual property loans. However, keep in mind that these loans may be harder to get and can create more risk in times of financial stress.
Tips for Financing Real Estate Investments
- Financing real estate can be a challenge whether it’s your first home or you’re a seasoned real estate investor. Our mortgage calculator tool helps estimate the monthly payment to determine how much you’ll pay on your loan.
- Financial advisors can help you incorporate real estate and other alternative investments into your overall financial plan. Understanding your complete finances allows them to build a personalized plan towards meeting your goals. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- The mortgage rate environment is more volatile now than ever. Check out SmartAsset’s mortgage rates table to get a better idea of what the market looks like right now.
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