A mortgage for residential landlords
Are you unfamiliar with the term “blanket mortgage?” Don’t worry. Plenty of professionals in the financial sector have never been near one. And they know little more about them than you do.
But if you invest in real estate — perhaps as a residential landlord — you may find a blanket mortgage (a.k.a. “blanket loan”) very useful to your business. Here’s what you should know.
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- What is a blanket mortgage?
- Advantages of blanket loans
- Drawbacks of blanket loans
- Other important info
- The bottom line on blanket mortgages
What is a blanket mortgage?
A blanket mortgage is a type of loan that finances more than one property at the same time.
Businesses often use blanket loans to buy commercial property investments. But this type of loan can also be useful for:
- Commercial landlords
- Residential landlords
- Property developers or flippers
- Construction companies
A key feature of the blanket mortgages is its lack of a “due on sale” clause. This means the blanket loan will survive the sale of one or more of the rental properties by which it is secured.
The property owner has to pay back (“retire”) the portion of the mortgage that the sold property represents. But they don’t have to refinance the entire loan.
Indeed, you may be able to negotiate a mortgage that lets you sell, buy, or substitute properties in your real estate portfolio with minimal fuss and expense.
Advantages of blanket loans
Having a “partial release clause” rather than a “due on sale” clause makes blanket mortgage loans particularly useful for property developers and real estate investors.
As a developer, you could use a blanket loan to buy tracts of land and build homes on them. Then, as you sell each individual property, you’d pay back only the bit of the mortgage that financed the single unit you sold.
This means you don’t have to manage lots of single mortgages,
or refinance the entire blanket mortgage each time you sell a piece of real
estate.
The same benefit applies to residential landlords. You might own 12 rental properties and spread their financing across just one or two mortgage loans.
Here are some of the other benefits a blanket mortgage can deliver:
Less paperwork
A blanket loan means much less paperwork. It allows you to apply for multiple mortgages with only one credit approval. That means you won’t have to submit credit, employment, or asset verification multiple times.
Plus, instead of making lots of mortgage payments a month, you’d make only one or two.
And buying and selling units might be possible with only minor tweaks to your existing blanket mortgage.
Save on closing costs
But that’s not all. Imagine the savings you’d make in closing costs, both for the original mortgages and any time you refinance the loan.
Refinancing from multiple loans to just one blanket mortgage could also provide savings on monthly payments, which could grow your cash flow. Though your savings would depend on the interest rates you’re currently paying and the new rate available to you.
More cash out
Combining all the equity you have across your portfolio might help expand your business. Because it could let you maximize the amount you receive in a cash-out refinance.
Better yet, you’d pay closing costs on just one cash-out refi transaction.
Easier to expand your portfolio
Many private real estate investors eventually come to a common obstacle: they’re allowed only so many single mortgages at one time. That cap can be a real barrier to expansion.
Of course, there are workarounds. Most commonly, landlords set up separate companies so that each company holds a small number of home loans.
But a blanket mortgage negates that need because it lets you own many homes with fewer loans.
Potentially better loan terms
Imagine someone who has 12 traditional mortgages with an average loan amount of $200,000. To each mortgage lender, they’re a homeowner with a $200,000 loan. They’ll hardly stand out from the crowd.
Someone with one $2,400,000 blanket mortgage owes the same amount. But they may receive V.I.P. treatment.
And they can use their high-roller status to leverage preferential loan terms and negotiate their own customized deal.
Once again, lowering borrowing costs can grow your cash flow from your real estate investment properties each month.
Drawbacks of blanket loans
As with most things in life, for every advantage, there’s a disadvantage. Here are some drawbacks that come with a blanket mortgage.
Not all lenders offer them
One of the biggest drawbacks to a blanket mortgage is that they’re not widely available.
It’s easy to find competitive offers for traditional mortgages. But it can be much harder to find a good deal on a blanket mortgage.
To start with, many lenders don’t offer them. So you have to find ones that do. Check with banks that offer commercial loans for starters.
You should explore your options with portfolio lenders (which typically see mortgages as their own long-term investments) as well as traditional and commercial banks.
Harder to qualify for the loan
You should also expect greater scrutiny of yourself, your financial portfolio, and your business plans when you apply for a blanket loan. After all, the mortgage lender is putting a great deal of its money at stake.
Compared to qualifying for a single mortgage, you’ll need a higher credit score and a larger down payment.
If you’re refinancing multiple mortgages into a blanket loan, expect to need a lower loan-to-value ratio — meaning you should have plenty of equity in the properties you plan to refinance.
Appraisal fees, title searches, and other closing costs could be higher, too, compared with a single mortgage.
Refusals are common. But don’t be put off. Seasoned landlords expect to be turned down sometimes, and are happy to keep looking for their perfect lender.
Shorter terms — but not always
It may be possible to find a blanket loan with a 30-year term. But it’s not easy. You’re more likely to find yourself with one that lasts 10 or 15 years.
However, don’t immediately move on if those short-term amortization schedules are too steep for you. Sometimes you can negotiate a final balloon payment that keeps your monthly payments affordable. Just be sure to refinance or sell in time!
More risk accumulated in one loan
A blanket mortgage puts all your eggs in one basket. This is much riskier than a traditional home loan.
If your business gets into trouble, you won’t be defaulting on one or two small mortgages. You could face foreclosure on all the rental units within your blanket mortgage at the same time.
Some landlords have multiple blanket loans, thus spreading that risk. But that only works if you have a substantial portfolio. The bigger these mortgages are, the greater the benefits they tend to deliver.
Other information about blanket loans
Each blanket mortgage tends to be custom-built. So how good a deal you get will depend on the soundness of your finances and business plan as well as your negotiating skills.
Blanket mortgages typically aren’t available for loan amounts below $100,000 or over $50 million.
Depending on your and your business’s financial health, you’ll usually be okay with a loan-to-value ratio (LTV) of 50-75%. For purchase loans, that means you’ll need a down payment of 25-50%.
You’ll also need substantial cash reserves to qualify, typically enough to cover six months of mortgage payments.
Interest rates vary hugely based on those same financial considerations.
The most sound borrowers with the best credit scores can get close to current mortgage rates for a blanket loan. But the least creditworthy who qualify could pay 10% or more.
So, what’s the verdict on blanket mortgages?
Clearly, blanket mortgages will benefit only a minority of landlords. Most will probably be better off sticking with their existing financing.
But some could find a blanket loan’s advantages highly valuable. If you have a significant portfolio, a strong business, and plenty of entrepreneurial flair, this type of loan could be worth exploring further.
What are today’s mortgage rates for landlords?
Today’s mortgage rates are near historic lows. Of course, blanket loan rates can be much higher than standard mortgage rates. But if you have excellent credit, plenty of cash, and you’re willing to shop around, you might find a great deal.
Verify your new rate (Dec 24th, 2020)
