Blanket Mortgage

Article byAswathi Jayachandran
Edited byAlfina
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Blanket Mortgage?

A blanket mortgage is a type of loan used to finance the purchase of several real estate properties together. Builders and developers who purchase big land and then divide it into numerous smaller parcels to be sold one at a time find blanket mortgages quite useful.

Blanket Mortgage

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The borrower uses the blanket mortgage, otherwise known as a blanket loan, to purchase all the units rather than obtaining a new mortgage each time a section of the property is sold. A portion of the mortgage is freed when a parcel is sold, but the remaining balance is kept.

Key Takeaways

  • A blanket mortgage is a type of single loan used to finance the purchase of several real estate properties.
  • A “release clause” in a blanket mortgage permits the partial sale of the secured property and corresponding loan partial repayment.
  • A blanket loan permits the partial sale of the secured property and corresponding loan partial repayment in connection with the sale of that section of the property.
  • This allows the borrower to pay a certain amount to discharge some lots while the mortgage covers the remaining lots throughout the development phase.

How Does A Blanket Mortgage In real Estate Work?

A blanket mortgage is a form of mortgage that helps raise funds in the real estate sector. Real estate investments require a sizable initial cash outlay, which one can acquire from various sources. However, large-scale real estate investments are often challenging to fund solely with personal savings. Therefore, the requirement for additional funding sources in property dealings is inevitable, and blanket mortgages are a viable option.

This type of mortgage essentially covers multiple parcels of land or lots. People typically utilize it to finance subdivision developments in the real estate sector. This allows the borrower to pay a certain amount to discharge some lots. At the same time, the mortgage continues to cover the remaining lots throughout the development phase of both parcels.

A “due-on-sale clause,” commonly appears in traditional mortgages, requires that the total outstanding mortgage debt be paid if the property secured by the mortgage is sold. On the other hand, a “release clause” in a blanket mortgage permits the partial sale of the secured property and corresponding loan partial repayment in connection with the sale of that section of the property.

The remaining outstanding sum is then modified accordingly. The blanket mortgage is then continued in this fashion, phase by phase, until all homes have been sold and the full mortgage has been paid off and retired. This enables a single mortgage to ease the purchase and sale of several residential units.

Blanket mortgage rates can differ from lender to lender. As a result, investors or buyers often need to dig to find the best lenders who can offer a good blanket mortgage rate.

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Requirements

Applying for a blanket loan is similar to a small business loan. However, there are a few requirements concerning the application, and they are:

  • Borrower’s credit strength The blanket mortgage lender will take the borrower’s personal credit history and income into account during the application. 
  • The credit strength of the business – Along with the business earnings and credit history, a debt service coverage ratio (DSCR) of at least 1.25x is necessary for the business to avail of the loan.
  • Industry knowledge This is crucial if the borrower is planning to build a huge project. Because the blanket mortgage lender is at great risk in this situation, they will want to know if the borrower has prior experience.
  • Strength of the property The lender will inquire about the number of properties included in the loan, the kind of properties included, the properties’ intended purposes, the location and state of any existing properties, and the value.
  • Net operational income If rental properties are part of the loan, the lender will be interested in the net income information.

Pros & Cons

The following are the major pros and cons of blanket mortgages:

Pros

  • These loans enable investors and borrowers to utilize multiple properties under one loan instead of separate loans. This saves a lot of time, energy, and money. In addition, they save a lot of paperwork as there is only one loan application.
  • A borrower with a blanket mortgage may retain more money because they only have to pay the fees for one loan rather than paying for numerous loans. In addition, a real estate investor may use the money saved through this for other purposes.
  • After the approval of the loan, borrowers will have one loan payment to handle and track each month.
  • The sale of one property is permitted with the condition that the property sold is paid off. Therefore, selling one property does not affect the remainder of the debt.

Cons

  • Blanket loans are not widely available, and getting one cannot be easy.
  • Unlike conventional mortgages, the loan terms may vary, and if it is defaulted upon, all of the properties secured can get lost.
  • Blanket mortgage lenders sometimes require a bigger down payment of 25% to 50%, which may be difficult for some borrowers.
  • Blanket mortgages can sometimes balloon payments. In those cases, the borrower must pay it off in full within a short period, and the last payment will be a single lump sum.

Blanket Mortgage vs Package Mortgage

Key pointsBlanket MortgagePackage Mortgage    
MeaningBlank mortgages are single loans on several properties at a time.Package mortgages are loans on the house and the personal property inside that space.
Amount sanctionedThe amount sanctioned is usually greater than that of package mortgages.Typically, the amount sanctioned is less in package mortgages than in blanket loans. But, again, this is because the latter involves multiple properties.
ExampleA construction company taking a loan to build several homes in one neighborhood is an example of this type of loan.Purchasing a furnished vacation home is an example of a package loan. The purchaser of a home in which furnishings are being sold could choose to apply for a package loan.

Frequently Asked Questions (FAQs)

1. What is the collateral in a blanket mortgage?

Real estate is the collateral for the mortgage. The pledged asset covers either two real estate pieces or more of them. However, one can sell individual real estate sections without paying off the entire mortgage.

2. Who would most likely obtain a blanket mortgage?

Rental property investors, House flippers, Builders, and developers are individuals who avail blanket loans apart from businesses to profit. Sometimes individuals also take out loans to make huge investments. Blanket loans help to fund huge real estate products.

3. How does a blanket mortgage work?

A blanket loan allows the borrower to partially sell a secure property in parts and repay the loan. This allows the borrower to pay a specific amount to discharge some lots while the mortgage continues to cover the other lots during the development phase of both parcels.

This article has been a guide to what is Blanket Mortgage. Here, we explain it with its requirements, pros & cons & comparison with package mortgage. You may also find some useful articles here –

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