A blanket mortgage is the perfect option for those who are looking to finance more than one property at the same time. It helps to reduce paperwork and cut down on costs.
However, for first-time real estate investors or ordinary homeowners, this loan type is not ideal, but if you are a developer of commercial or residential real estate or an experienced investor, a blanket mortgage can be a very helpful tool.
What is a Blanket Mortgage?
A blanket mortgage is a type of financing that allows the borrower to cover multiple properties under a single loan. It is particularly useful for investors and developers who manage several pieces of real estate at once.
This financing tool streamlines the process of managing mortgages for multiple properties, consolidating them into a single loan with one monthly payment.
How Does It Work?
A blanket mortgage consolidates the mortgages for several properties into one loan agreement. The borrower makes one payment to the lender, covering all the properties under the blanket mortgage.
It typically has a release clause, allowing the borrower to sell one of the properties covered by the blanket mortgage without having to pay off the entire loan. The proceeds from the sale can be used to release that specific property from the blanket loan, while the remaining properties stay under the original loan terms.
Blanket Mortgage Requirements
Lenders will assess various criteria to decide on your loan eligibility:
- Personal Financial Health: This includes your credit score, work history, and evidence of income.
- Business Financials: For business applications, lenders look at your business’s revenue and credit standing. A key factor is your business’s debt service coverage ratio (DSCR), which ideally should be at least 1.25 times.
- Experience in Property Development: If your project involves significant construction, like building an apartment complex, developing commercial space, or renovating a residential property, your previous experience in such projects will be evaluated.
- Property Portfolio: The loan application should detail the number of properties involved, their types, locations, present condition, and your plans for them.
- Profitability Projections: Lenders will consider the projected income after deducting vacancies and operational costs for rental properties.
Required Documentation
- For personal evaluation: Credit reports, tax returns, and bank statements.
- For business evaluation: Business credit reports, tax returns, and bank statements.
- Regarding the property: Addresses, detailed descriptions, photographs, and the purchase date if the property has already been acquired.
- Financial Aspects of the Property: Purchase price or asking price, current market value, renovation costs, and any existing financing, along with a detailed business plan or proposal.
- Operational Finances: Information on tenants, vacancy rates, operational expenses, fees, and the property’s net operating income.
Pros and Cons
Pros
- Simplifies the management of multiple properties.
- Offers potential savings on closing costs and fees.
- Facilitates the purchase or development of multiple properties simultaneously.
- Flexible selling through partial release clauses.
- Can improve cash flow management.
- May offer more favorable financing terms.
- Streamline refinancing by combining several properties.
Cons
- There is a higher risk if one property underperforms.
- More complex to set up compared to individual mortgages.
- Potentially higher interest rates.
- A default on one property can affect the entire loan.
- Not all properties may qualify under one lender.
- May include prepayment penalties.
- Limited availability from lenders.
Who Is Blanket Mortgage For?
These are the people who are best fit to take out a blanket mortgage:
- Real estate investors looking to manage several properties easily.
- Developers planning to purchase multiple lots for construction.
- Owners of adjacent properties wanting to consolidate mortgages.
- Real estate companies expanding their portfolio.
- Builders needing to finance subdivisions or multiple units within a development project.
- Investors planning to flip multiple properties.
- Landlords with multiple rental properties seeking streamlined financing options.
How to Get a Blanket Mortgage
Should you determine that a blanket mortgage aligns well with your investment strategy, initiating the application process is necessary. However, it is important to note that this process diverges from that of a standard mortgage. Below is a breakdown of the essential steps:
- Identify an appropriate lender.
- Compare rates and terms.
- Understand lender requirements.
- Complete the application.
• Identify an appropriate lender
Blanket mortgages are not commonly provided by traditional banks and credit unions on Main Street. Instead, your search will likely direct you toward a commercial lender, one that furnishes financial solutions for businesses or investment ventures. Additionally, some mortgage brokers are specifically versed in these types of loans.
• Compare rates and terms
Given that blanket loans often feature higher initiation fees, expect the down payment and associated costs to surpass those linked with conventional residential mortgages. Engaging in comparative shopping is vital to discerning what constitutes a fair deal and what does not.
• Understand lender requirements
Similar to any loan application, blanket mortgages necessitate that applicants satisfy certain criteria, including a minimum credit score and a specific debt-to-income ratio (DTI). Expectations may be more stringent for these loans. Lenders may also evaluate your business’s credit standing and debt-service coverage ratio (DSCR), if relevant.
• Complete the application
Preparation is very important; make sure you have all necessary business-related documents ready. For example, your credit reports, tax returns, and financial statements. The lender will need comprehensive details about the properties you aim to finance. This includes their market value, any planned renovations, and the potential rental or lease income they could generate.
