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Tips for landlords: why landlords should consider a blanket mortgage

Peter WardenThe Mortgage Reports Contributor

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. So read on to discover more.

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What is a blanket mortgage?

A blanket loan is a mortgage that finances more than one property. So businesses use them for real estate investments. And borrowers might be commercial or residential landlords, or property developers/flippers or construction companies.

One of these mortgages’ most attractive features is their lack of a “due on sale” clause. That means the blanket loan will survive the sale of one or more of the properties on which it is secured. You have to pay back (“retire”) the portion of the mortgage that the sold property represents. But you don’t have to refinance the whole loan.

Indeed, you may be able to negotiate a mortgage that lets you sell, buy or substitute properties with the minimum of fuss and expense.

Advantages of blanket loans

Having a “release clause” rather than a “due on sale” one makes these particularly useful for property developers.  You buy a tract of land and build homes on it. Then, as you sell each unit, you pay back only the bit of the mortgage that home secured. So you don’t need either lots of loans or multiple refinancings.

But the same benefit applies to residential landlords. You might own 12 homes and spread their financing across just one or two mortgages. Here are some of the benefits that could deliver:

Administrative gains

A blanket loan means much less paperwork. Instead of making 12 mortgage payments a month, you’d make only one or two.

Similarly, you’d have fewer statements to file, queries to respond to, obligations to meet and points of contact to build relationships with.

And buying and selling units might be possible with only minor tweaks to your existing blanket mortgage.

Cost savings

But that’s not all. Imagine the savings you’d make in closing costs, both for the original mortgages and any refinancings.

Indeed, refinancing itself from multiple loans to just one blanket mortgage could provide savings on monthly payments. Though that would depend on the rates you’re currently paying and the new one available to you.

More cash out

And, of course, 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 refinancing.

Better yet, you’d pay closing costs on just one refinance transaction.

Easier to expand

Many private landlords eventually come to a common obstacle: they’re only allowed so many mortgages at one time. That cap can be a real barrier to expansion.

Of course, there are work-arounds. Most commonly, landlords set up companies so that each has a small number of mortgages.

But a blanket mortgage negates that need. Because it lets you own many homes with fewer loans.

More clout

Someone with 12 mortgages with an average value of $200,000 is, to each lender, someone with a $200,000 loan. She’ll hardly stand out from the crowd.

Someone with one $2,400,000 blanket mortgage owes the same amount. But she may receive V.I.P. treatment.

And she can use her high-roller status to leverage preferential loan terms and negotiate her own customized deal.

Drawbacks of blanket loans

As with most things in life, for every advantage, there’s a disadvantage. Here are some that come with a blanket mortgage:

Shorter terms —but not always

It’s not impossible to find a blanket loan with a 30-year term. But it’s not easy.

You may find yourself with one that lasts 10 or 15 years. However, don’t immediately move on if those 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!

Eggs and baskets

The more eggs you have in one basket, the greater your risk. Because, 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.

So 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.

Harder to get

It’s easy to find competitive offers for mainstream mortgages. Readers of The Mortgage Reports do so every day — in minutes.

But it can be much harder to find a blanket mortgage. To start with, many lenders don’t offer them at all. So you have to find ones that do.

Then, you have to expect even greater scrutiny of you, your business and your plans than you would with mainstream lenders. After all, there’s a great deal of their money at stake.

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. 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.

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.

But you’ll be extraordinarily lucky to get a blanket loan for less than $100,000. And you’d need to be an exceptionally attractive risk to get one for more than $50 million.

You’ll need some cash reserves, typically enough to cover six months of payments. And, depending on your and your business’s financial health, you’ll usually be okay with a loan-to-value ratio of 50-75 percent.

Interest rates vary hugely based on those same financial considerations. The most sound borrowers can get close to current mortgage rates for consumer borrowers. But the least creditworthy could pay 10+ percent.

So what’s the verdict?

Clearly, blanket mortgages will only benefit a minority of landlords. Most will probably be better off sticking with their existing financing.

But some could find the advantages they bring highly valuable. If you have a significant portfolio, a strong business and plenty of entrepreneurial flair, they could be worth exploring further.

What are today’s mortgage rates for landlords?

Today’s mortgage rates are higher than they have been in a few years, but they are still historically low. If you buy and lock in a fixed rate today, that’s one fewer thing to worry about in the future — rising mortgage costs.

Verify your new rate (Sep 25th, 2018)