Blanket mortgages, also sometimes referred to as blanket loans and portfolio loans, are mortgages that allow real estate investors growing their portfolios the opportunity to bulk finance them. With a portfolio loan, investors can buy, refinance, hold and sell multiple properties in one loan, with one payment, and one lender.
Until recently, blanket mortgages were utilized almost exclusively by commercial property investors, as well as builders and developers who buy large tracts of land, subdivide them into separate parcels, and gradually sell them one at a time. It wasn’t until some point between 2011 and 2014 that blanket loans became a viable avenue for single family residential investors to refinance and expand their portfolios.
Related: The best blanket loan for rental investors
Types of blanket loans
Blanket mortgages fall into two primary buckets. First, there are those that are designed primarily to group together properties of similar class and condition. The primary benefits to a borrower for these types of blanket loans are ease of use and reduced expenses. By grouping together like properties, an investor reduces the hassle factor associated with keeping track of dozens or even hundreds of mortgages and payment dates and mortgage servicer relationships. The investor also often saves in origination fees.
Some lenders offer blanket mortgages on diverse properties. They likely are all still the same class of properties, such as one-to-four unit or single-family properties, but not every property can qualify by itself for mortgage finance. By pooling the properties together, investors may be able to get financing for an otherwise difficult-to-finance property, such as a low value home. These blanket loans, however, can be more expensive and difficult to obtain, often require non-refundable deposits at application, and include substantial restrictions on the investors operating activities.
Why and when to use a portfolio loan over a single-asset loan
We like the way Adam Lesner puts it, “The mortgage world is extremely regulated. From having to re-disclose a loan package within a certain number of days every time a loan officer sneezes, to having to get a letter of explanation for nearly every life event in the most previous two years… getting a regular mortgage is not as simple as it once was. So imagine getting 5, 10, 15 loans individually within a 3-6 month period. That means your entire portfolio is re-reviewed each time, possibly by a different underwriter. Yeah, no thanks.”
For investors with multiple properties, having a single-asset mortgage on each one can be a hassle. Imagine having to keep track of dozens or even hundreds of mortgages and payment dates, not to mention the fact that they’re likely serviced by several different providers. Plus, for every loan you get, you must pay fees at closing.
Blanket mortgages remedy this by covering several properties in one loan, with one fee, one monthly payment, and one lender.
Traditional single-asset mortgages have a due-on-sale clause, which requires the entire outstanding mortgage debt to be paid in full as soon as the property secured by the loan is sold.
A defining characteristic of a blanket mortgage is the release clause, allowing for the sale of properties within the portfolio without causing the whole loan to come due. Once a property is sold, a portion of the mortgage is released, while the rest of the mortgage remains in effect. With a blanket mortgage, a release clause replaces the due-on-sale clause, allowing investors to sell a property/properties covered by the blanked mortgage without having to refinance or pay the whole portfolio loan off. Instead, investors must either replace sold properties with new ones or reduce the total loan amount. This offsets the risk for the lender associated with reducing the collateral backing the loan. “Release pricing,” usually expressed as a percentage, is the amount that an investor would have to pay upon the sale of a portion of the portfolio to offset this risk.
For example, let’s say your lender’s release pricing is 130%. This means that you must pay off the amount of the loan covering the asset(s) sold PLUS pay 30% of the original unpaid balance of the asset(s) sold to go towards paying down the remainder of the loan.