A blanket mortgage is a real estate loan that covers more than a single parcel of land.
This allows investors and developers to manage a single mortgage even though they have multiple properties to finance.
A blanket loan enables them to pay a single scheduled payment with terms that covers all the properties under that blanket.
Sort of line a blanket insurance policy which charges the same premium for all the policies under it.
Borrowers would be able to save costs in the tracking and managing of loans for each and every property. It also eliminates the tendency of mistakes when there are too many debt obligations to keep track.
Because of the scale of such loans, borrowers are usually developers and investors who have control over a huge land area. Regular homeowners with single-family homes would have no used for blanket loans.
In addition to this, they usually come with release clauses that allow a borrower to remove a particular parcel from the mortgage, which in turn makes it easier to sell that particular parcel to interested parties.
This implies that there would not be any due-on-sale clauses in such loans.
The borrower can then decide (depending on terms of contract) to either keep the proceeds collected from individual plot sales for capital expenditure or use the funds to prepay part of the loan to reduce the principal.
These unique features of blanket mortgages make them ideal in satisfying the needs of developers who snap up huge sites with the intention to build condominiums, town houses, clustered housing, etc, on them.
Otherwise, an alternative source of funding to explore would be construction financing.
Advantages of blanket mortgage
The biggest advantage such loans, as stated previously, is the ease of management compared to having multiple debt obligations to oversee.
Consolidation also drastically helps the borrower to save money from closing costs as there would be only one loan to close.
Imagine having to pay for junk fees for each and every mortgage and you should be able to easily see the benefits of a blanket loan arrangement.
Saying this, do expect total closing expenses to greatly exceed that of a typical mortgage.
Another big advantage with these loan structures is that there is no limit on the number of properties that can be covered by the blanket.
This means that you can include as many properties in the deal as you like.
This can be extremely valuable for real estate investors in certain states when there is a limit to the number of mortgage an entity can obtain.
Because blank mortgages are often of considerable loan size, obtaining one would so provide this benefit of having experience with a larger borrowing clout.
This can be a key criteria when lenders underwrite huge loans to borrowers as they want to see if an applicant has the experience with borrowing and managing large loans.
Despite the various pros of blanket loans, they also come with some very severe disadvantages.
Disadvantages of blanket mortgage
Firstly, they can be very difficult to obtain approval for as they understandably don’t undergo the regular assessment criteria for traditional homes loans.
Sometimes, even the approval of one can take up to weeks or months.
Be prepared to submit a flurry of required documentation including:
- Profit and loss statements
- Cash flow statements
- Balance sheets
- Insurance policies
- Building contracts
For really big blankets, be prepared to submit audited financial statements as well.
Mortgagors might also face problems with selling individual lots when there is an absence of a partial release provision.
This is understandably so as who would be in the right frame of mind to purchase land under a active blanket loan.
As the loan would cover all land parcels resulting in all properties acting as collateral for each other, the default of this single loan would result in the repossession and foreclosure of all of them.
This scenario is actually not that far fetched.
For example, if the developer is highly dependent on rental income for cash flow, then the under-performance of one property can lead to the fall of a house of cards.
Refinancing it can be a huge challenge too.
Why take blanket loans?
There are a couple of big reasons for developers to choose blanket mortgages instead of having each plot obtaining it’s own separate financing.
The first is the convenience of consolidating all of them under the same umbrella. The second is the timely disbursement of funds.
Borrowers could very well save money on interest costs by getting a separate mortgage for each property.
But it will be time-consuming and might make a mess of things. Causing delays and problems with working capital.
The release of funds for each property might also not be able to meet their timelines for funding.
It can be a very difficult balancing act to handle when there are many different lenders to handle and various different disbursements to monitor.
A single blanket loan from a lender would be able to ensure that all building and constructions plans will only have one schedule to follow in terms of the release of funds.
And because of the huge undertaking that lender and borrower are cooperating on, there almost certainly will be room to customize aspects of the loan in order to help the project succeed.
After all, lenders would not want to see such projects fail.