If you’re interested in purchasing two or more properties, taking out separate mortgages for each of them can be complicated and expensive. A blanket mortgage can simplify things, but it also carries risks.
How Does a Blanket Mortgage Work?
With a blanket mortgage, a borrower uses one loan to buy multiple properties. Real estate investors, developers and house flippers frequently use blanket mortgages.
In many cases, a borrower can purchase several properties with a blanket loan, then take advantage of a release clause and sell the properties individually. The mortgage continues to cover the remaining properties.
Advantages of a Blanket Mortgage
A blanket mortgage can save time and money. Instead of going through a loan approval process for each individual property, a borrower can go through one process and secure funding for several properties.
A borrower might be able to get a blanket mortgage with more favorable terms, such as a lower interest rate, than individual loans would have. That can lead to lower monthly payments and leave more funds available to use for other purposes. In addition, a borrower can save money by paying only one set of fees, rather than taking out a series of mortgages and paying fees for each.
Managing monthly loan payments can be easier with a blanket mortgage. Instead of juggling multiple payments, everything can be covered under a single mortgage with one monthly payment.
Disadvantages of a Blanket Mortgage
Some blanket mortgages have low payments for a period of time, then require a large balloon payment to pay off the remaining loan balance. That structure can be beneficial to developers and house flippers, who need to have enough money available to buy supplies and pay contractors. If things don’t go according to plan, however, it can lead to serious financial trouble.
With a blanket mortgage, properties are used as collateral for each other. A borrower who defaults on a loan can lose one or more properties.
Is a Blanket Mortgage Right for You?
Lenders are more likely to approve blanket mortgages for experienced real estate investors and builders. If you’re new to real estate investing, you’ll be better off with a conventional loan.
If you think a blanket mortgage would be a good option for you, you might have a hard time obtaining one. First of all, many lenders don’t even offer blanket mortgages.
If you find a lender that does offer blanket loans, you’ll have to meet strict criteria to qualify. You’ll most likely have to make a large down payment. You won’t be able to use a blanket loan to buy properties in multiple states because of differences in state laws and guidelines.
Before you apply for a mortgage, think about your goals and explore your options. Weigh the pros and cons of different types of loans and get quotes from several lenders.
