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The Pros and Cons of a Blanket Mortgage

blanket loans pros and cons of blanket mortgage

If you’re a commercial real estate investor with more than one property, then you know that juggling multiple mortgages with different interest rates and different terms can sometimes be a chore.

With a blanket loan, you make one payment to one bank with one set of terms. It allows you to buy, hold, or sell numerous properties under one mortgage without triggering a due on sale clause.

Since there is often no limit on the number of properties an investor can have under a blanket loan, investors can use the clout they gain from these larger loans to access additional equity, negotiate better loan terms, or simply lower monthly payments.

For smart investors, blanket loans offer numerous advantages.

Consolidate Properties For A Refinance

additional properties can be used to negotiate better terms with lenders thus lowering your monthly payment

The simplest reason why an investor might choose a blanket loan is to consolidate numerous loans from different lenders under one financing arrangement.

At the same time, the additional properties can be used to negotiate better terms with lenders, thus lowering your monthly payment. This, in turn, increases your net cash flow and raises the properties’ value.

Gain Access to Additional Equity

gaining more access to cash

Let’s say you wanted to get together funds for a down payment on another investment property, or to rehab one you already own. By pooling your properties together under one loan, you can often gain access to a greater amount of cash than you would normally have access to.

Generally, banks won’t finance a loan for a lot that isn’t free of mortgages. Although lenders claim the policy protects them in the event a developer defaults on the loan, this can be a problem if you’re a builder or developer who needs to release liens already present on the land.

However, if a property is bundled together with other lots under a blanket loan, the developer can utilize a partial release provision.

A partial release clause is added to a mortgage in order to allow the lender to release one of the properties as the owner pays down the mortgage.

The lender assigns a loan value to each property and specifies a percentage of the sale price or the loan amount that must be paid in order to release a property. Many lenders will want a higher percentage to reduce the total outstanding debt, however, you can often negotiate this percentage.

It might seem like it would make more sense to prorate the loan among the various properties and release each property when the amount received equals the loan value assigned to each unit. Lenders don’t do this, however, since they assume that there is some amount of error in the appraisal amount.

This could leave them with a loan where some properties have already been released, and the remaining properties are worth less than the remaining amount of the loan.

This provision allows the developer to finance the lots, and remove the lien from each lot when it is sold and the lender receives a portion of the borrowed loan.

advantages and disadvantages of blanket loans

Disadvantages of a blanket loan

Difficult to sell individual properties
Blanket loans do have their disadvantages. As a borrower, it is sometimes more difficult to sell or refinance the properties separately. For example, if the loan isn’t structured as a partial release and there is a due on sale clause, then the sale of one property could cause the entire mortgage to come due.

High closing costs
Some investors assume the cost of financing several properties together will be less than if they were financed individually. It’s not unheard of to end up paying a higher rate, and you’ll also most likely need a lower LTV. Closing costs will also be high since they are based on the total number of properties and not the amount of the loan.

The lender will also require that all properties be appraised and may also want you to have physical inspections performed on the properties. Combine these with title searches and title insurance, and completion of any repairs or maintenance, and you could be adding a hefty amount to the loan’s closing costs.

Blanket loans are limited to one state
Because each state has its own guidelines for blanket loans, you will need a blanket loan for properties in each state. Thus if you have properties in New York, New Jersey, and Florida, you will need three separate blanket loans.

All properties serve as collateral for each other
Because all the properties act as collateral for each other, defaulting on the mortgage means your lender can foreclose on all the properties in order to recoup their losses. Thus, if one property fails to bring in the expected cash flow, it could jeopardize your entire portfolio.

When things are going well, don’t start piling on deals just because you can, as you may regret it later. Rents can fall, especially if a local large employer leaves the area.

Blanket Mortgage vs Wrap-Around Mortgage

A wraparound is a loan where the lender assumes responsibility for another mortgage.

Let’s say, for example, the sale price of a property is 500,000 but there is already a loan on the property for 200,000. If the buyer puts down 100,000 as a down payment, then the lender will give a mortgage on the remaining 400,000. This new mortgage wraps around the existing mortgage of 200,000 because the new lender will now be assuming responsibility for the old mortgage.

A wraparound mortgage is not the same as a blanket mortgage, however, since a wraparound mortgage is meant to cover the mortgage for one property, not several.

Blanket Mortgage vs Bridge Loan

Blanket Mortgage vs Bridge Loans

Commercial bridge loans are short-term loans used by commercial real estate investors until permanent financing is found. Bridge loans are often used when to pay for renovations on a newly purchased income property; once renovations are completed the property then qualifies for permanent financing.

They’re also used to refinance commercial properties or to purchase raw land that will later be developed as commercial properties. Bridge loans differ from blanket loans, however, in two ways: they are short-term, and they cover only one property.

Blanket loans aren’t necessarily easy to find. You may need to search smaller banks or credit unions that specialize in commercial loans. You should also keep in mind that blanket loans aren’t meant to be long-term loans. They aren’t fully amortized and aren’t likely to be renewed by the lender.

Working on the refinancing of a blanket loan at least six months before it comes due will allow you to take advantage of the many benefits while taking advantage of the infusion of cash.

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Tags: Blanket Mortgage, Bridge Loan, commercial real estate, commercial real estate investor, commercial real estate properties, loans, mortgage