Also known as a blanket mortgage, a blanket loan allows you to use one, single loan to buy several pieces of property. This eliminates the need to take out a new loan for each individual piece of property you wish to add to your real estate portfolio.
How Do Blanket Loans Work?
A blanket mortgage requires collateral. The lender will evaluate your financial report to determine your ability to pay the loan back. As a borrower, if you can’t make the payments on time, the blanket loan becomes defaulted and you lose the entire portfolio of properties purchased with the loan.
With a traditional loan, the borrower must follow the “due on sale” rule. This clause states that if the property is sold, the borrower must pay off the entire balance of the loan. No such clause exists with a blanket mortgage if you decide to sell one or more pieces of real estate covered by the loan itself.
Who Would Use A Blanket Loan?
Blanket mortgage loans are not intended for consumers purchasing primary or vacation homes or single investment properties. This loan type is best for a borrower or investor who plans to buy a portfolio of real estate.
These are some of the groups that would turn to this type of loan for building the property portfolios:
- Developers and Builders – These professionals use these loans to purchase one large plot of land and develop it into multiple pieces of property all at once.
- Commercial and Residential Landlords – Oftentimes, landlords take out these loans to finance a few properties at one time to rent them out while building their rental property portfolios.
- Real Estate Investors – Blanket loans allow investors to purchase multiple properties for investment purposes.
- Business Development – Using this single financial instrument, a business owner can buy and open multiple company locations at the same time.
- House Flippers – Also known as rehabbers, these borrowers streamline the process of flipping properties by purchasing, improving, and selling multiple homes all at once.
Benefits of a Blanket Mortgage Loan
Instead of the “due on sale” clause that comes with a traditional loan, blanket mortgage borrowers and investors are held to a “partial release clause.”
A developer may use such a loan to purchase tracts of land, develop that land and build multiple homes on it. As each individual home is sold, the borrower would only repay the portion of the loan used to finance that particular single unit.
The main advantage in this situation is that you online end up with one single mortgage instead of multiple mortgages. As each property sells, there’s no need to refinance the entire blanket mortgage.
Here are some of the other major benefits of a blanket loan:
- Less Documentation – Multiple mortgages mean juggling a lot of paperwork. Purchasing multiple properties using one single loan equates to less paperwork for the investing borrower, as well as one single employment and credit check.
- Lower Closing Costs – With a traditional mortgage, the borrower generally pays 2-5% of the amount of the loan in just closing costs alone. A borrower will see substantial savings by paying closing costs on one loan versus more than one.
- One Low Mortgage Rate – Although mortgage rates are currently low, this could change at any time based on our economy. Instead of dealing with a different rate for each property, this loan allows you to pay one rate, which is generally 4-11 percent for a blanket loan.
- Simpler Portfolio Expansion – Most private real estate investors are only allowed to have a certain amount of single mortgages outstanding at any given time, creating a barrier that slows down expansion. A blanket mortgage allows these investors to purchase many pieces of property with fewer mortgages.
- Combined Equity – Since these loans allow you to buy many properties at one time, they automatically improve your equity as time goes on. Therefore, if you choose to do a cash-out refinance down the line, you can maximize the amount you get during the refi.
Traditional Mortgage Versus Blanket Mortgage
Let’s say you decide to purchase 10 pieces of property financed by 10 traditional loans with each individual mortgage being about $250,000. To the lenders, you’re simply a homeowner with a $250,000 mortgage, which is nothing special.
However, with one $2,500,000 blanket loan, you essentially owe the same amount. But your lender will treat you like a star, giving you V.I.P. treatment. This places you in the status of a high roller, which allows you to negotiate privileged loan terms as well as customized deals.
How to Get a Blanket Loan
As noted above, you have a better chance of obtaining a custom-built loan with a blanket mortgage. But your V.I.P. treatment depends on the reliability of your business plan and overall finances. Your negotiation skills matter too.
Blanket mortgages are generally unavailable for amounts under $100,000 or over $50 million. Your loan-to-value (LTV) ratio should be 50-75%. And you’ll most likely need 25-50% for the down payment and a cash reserve that covers about six months’ worth of loan payments.
With an excellent credit score, you may get financed for a blanket loan with a mortgage rate that meets that of the current market. However, less creditworthy borrowers who qualify for blanket mortgages may find themselves paying over 10% for their rates.
Although these loans tend to come with higher down payments and mortgage rates than traditional mortgages, you save money by paying just one closing cost while having access to customized packages. These loans make it easier for investors to buy many properties at one time. It’s also easier managing one single mortgage versus many mortgages with multiple lenders.
If you have strong credit, good business sense, and the finances to back up your purchase, a blanket loan may be the best route for you to build your real estate portfolio. And with today’s mortgage rates being so low, this may be the best time to make your move toward becoming an investor using a blanket mortgage.
Give Titan Lending a call at 855-910-6434 to discuss your Florida real estate investment needs. Or click here to contact us online and we’ll get back to you as soon as possible.