If you want to take your successful real estate investing business to the next level by buying multiple properties at once to develop, a blanket loan (or a blanket mortgage) may be your best option. A blanket loan combines separate mortgages for different properties into a single loan. This type of loan simplifies the process and monthly payment system for real estate investors looking to grow their portfolio.
In this article, we’ll cover what blanket loans are, how they work, and the pros and cons of using them to build your real estate portfolio.
What is a blanket loan?
A blanket loan is two or more mortgages combined into a single mortgage. It streamlines the lending process for real estate developers buying multiple properties at one time or consolidating multiple loans into one. Blanket mortgages often don’t hamper your ability to sell your properties individually, either. Thus, you may be able to sell one property on the blanket loan and keep the others on the same mortgage. This may vary according to the loan terms, so make sure you understand the terms before you sign.
Another unique aspect of blanket loans is the way the risk on collateral works. Each property on the loan acts as collateral for the others. So if you stop making payments on one of the properties, the rest could be at risk of being seized.
What are blanket loans for?
Blanket mortgage loans are most frequently used to buy commercial or residential properties in bulk, or for buying separate parcels of land for development. For instance, you can buy several pieces of real estate from different sellers on one blanket loan, then sell the individual lots to new homeowners. House flippers also use these mortgage loans to obtain multiple properties at once.
You can’t use a blanket loan to purchase primary residences, vacation homes, or your first investment properties, however. To qualify, you’ll need to have a large real estate portfolio under your belt.
How does a blanket loan work?
Like with any commercial real estate loan, getting a blanket loan works much like the home buying process with a single property. Before you receive any home loan, you have to go through the underwriting process. This process looks into your company’s financials, (i.e. cash flow), in addition to completing a title search and appraisal on each property.
Once approved, you’ll receive one loan with a single interest rate that covers each of the real estate properties. Keep in mind that this interest rate is typically higher than a standard mortgage rate, and you’ll pay interest on the total loan amount.
If your blanket loan includes a partial release clause, you can sell individual properties without having to refinance (note: refinancing a blanket loan should still be an option if needed). Also, you have to cover any lost collateral when you sell one of the properties. Instead of depositing all the proceeds from a sale into your checking account, you’ll need to pay back the portion of collateral covered by the property you sold.
Pro tip: When comparing blanket loans, look at interest rates, mortgage payment terms, and fees — including whether or not it will cost extra to pay back the loan early.
What does a blanket loan cover?
A blanket loan covers two or more mortgage properties at once. The most common use of blanket loans is for commercial properties, like office buildings, but you can also use them for residential real estate, like apartment complexes, multifamily units, or rental properties.
These loans can also cover land purchases — both developed and undeveloped. If you’re planning to develop the land and need funding on top of your mortgage, a construction loan for business could help cover the costs.
Pros and cons of a blanket mortgage
Here we highlight the main perks of blanket loans, as well as a few things to consider before using a blanket loan to purchase real estate.
- May save time. Instead of going through the lengthy process of getting a mortgage for each of the properties you’re buying, you only have to sign on the dotted line(s) for one loan. This can save you time when getting the mortgage and making monthly payments.
- May save on closing costs. Instead of paying on each individual mortgage, you’ll pay many closing costs on one loan only. Borrowers looking to fund several mortgages at once can save cash by using a blanket loan.
- Possible balloon payment structure. With balloon payments, you pay less in the beginning of the loan and more later. This structure can make up-front costs more manageable for certain use cases, like house flipping. But it’s only available to the least risky borrowers, or those with top credit scores and a large amount of assets.
- Bigger down payment and interest rate. With a blanket loan, you may need to offer up to between 25% and 50% down. This amount of funding can be a barrier for some real estate developers. You also might run into a higher interest rate of between 4% to 11%, depending on your risk as a borrower.
- Greater risk. Like all mortgages, the property you buy becomes collateral to secure the loan. With a blanket loan, however, there are multiple that are on the line. So if you can’t manage to make payments on one, they can all be seized by the mortgage lender.
- May be limited by geography. Depending on the lender, you may be expected to buy properties in the same area of the country. This limitation might not work for your business if you want to open several office buildings in different regions.
How to qualify and apply for a blanket loan
To qualify for a blanket loan, you’ll want to have a substantial real estate portfolio already, as well as a lot of cash upfront. A blanket loan isn’t the best option for a new real estate investor because they typically won’t be able to afford the higher down payment and fees.
Blanket mortgage lenders may be more difficult to find than others. Some bigger banks and online lenders offer them, but you’ll likely find the most success with commercial lenders offering commercial loans. If a blanket loan isn’t right for you, there are many alternatives that can help satisfy your business needs. Use Nav to compare your best options instantly.