Deciding to buy multiple real estate properties is like deciding to adopt twins or triplets. A larger bundle of joy can be exciting, but you must consider that you are taking on double or triple the responsibilities. Fortunately, having multiple mortgages is not always an extra responsibility for buyers with many properties. Consider wrapping yourself up in a blanket mortgage to cover more than one piece of real estate.
What is a blanket mortgage?
Simply put, a blanket mortgage covers multiple properties. If a borrower plans to buy or invest in, say, 10 individual properties, they will not have to obtain 10 individual mortgages. They can apply for a blanket loan that helps to pay off every property through one monthly payment.
Who can benefit from blanket mortgages?
Homeowners with an owner-occupied residence and a vacation home may want to keep their two mortgage payments separate. Blanket mortgages largely benefit investors with multiple commercial properties. Home flippers may also enjoy the flexibility of a blanket mortgage.
Pros and Cons of Blanket Mortgages
Before you start the application process, consider whether a blanket mortgage is right for you and your long-term investment plans.
Pro: One Payment
The idea of making one monthly payment is certainly less stressful than making multiple monthly payments. If you plan to own a large number of properties, a blanket mortgage can help you manage all of these payments. Borrowers also do not have to worry about paying closing costs and fees on each individual mortgage.
Con: One Payment to Default On
This one payment is going to be quite large. Having to pay one large payment comes with higher risks than having to pay multiple, smaller payments. It is easier (and more detrimental) to default on a blanket mortgage.
Pro: No Due on Sale Clause
Some real estate investors must constantly move pieces of real estate in and out of their portfolio. Individual mortgages may come with prepayment penalties or other fees for selling a property before the loan balance is paid off. One of the best benefits of blanket mortgages is the release clause. This clause allows borrowers to sell properties that are covered by the blanket mortgage without paying off the full mortgage. (Some mortgages require borrowers to replace sold properties within a certain time frame.)
Con: Blanket mortgages aren’t always easy to come by
Blanket mortgages have a higher risk of defaulting and lenders aren’t exactly jumping to give out blanket mortgages. Borrowers will find that they need to meet high qualifications in order to secure a blanket mortgage, including industry experience and a desirable cash flow. In order to qualify, lenders may require buyers to have six months worth of mortgage payments in cash reserves.
Borrowers should look to private lenders and smaller banks for blanket mortgages. These institutions understand what developers and investors need to manage multiple commercial properties.
Pro (or Con): Blanket mortgages are more customizable than traditional loans
When borrowers apply for a traditional loan, they know what to expect in terms of fixed vs. adjustable rates, payment schedules, and interest rates. Lenders are more likely to customize the blanket loan terms based on the goals of the borrower, industry experience, amount of cash available to take out the loan, etc. Custom rates could be an advantage or disadvantage depending on your qualifications. Borrowers may also be able to negotiate these terms before applying for their loan.
Con (or Pro): Shorter Loan Terms
Borrowers can expect that their blanket loan terms will be shorter than comparable traditional loan terms. Loan amortization schedules may span up to 20 or 30 years, but most lenders require borrowers to pay blanket mortgages back in 10 or 15 years.
What You Need to Apply for a Blanket Mortgage
Before you secure a blanket mortgage, you will have to gather quite a few documents. Lenders will take your personal information into account, but they are more concerned with the strength of the properties that will be covered. Lenders will not approve blanket loans to new borrowers who want to amass a lot of commercial properties in a volatile market.
When you apply for a blanket mortgage, you will need to submit:
- Personal financial documents
- Business financial documents
- Number of properties, property finances, and details
Gathering the required details on a single property alone can be a lot of work: you will need photographs, proof of purchase, documented renovation costs, appraisals, and your net income of the property. In order to apply for a blanket mortgage for multiple properties, you will have to present all this information for each property that will be covered by the blanket loan.
Talk to a financial advisor about whether you are ready to take out a blanket mortgage and how to get started on the application process.