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If you’re looking to finance multiple properties at once, an umbrella loan is a great way to cut costs and eliminate paperwork. While this type of loan isn’t suitable for the average homeowner or first-time real estate investor, it’s a useful tool for seasoned investors and developers of residential and commercial real estate. So what exactly is an umbrella loan? Let’s take a closer look.
What is a Blanket Mortgage?
A blanket mortgage (also known as a blanket loan) is a mortgage that covers multiple properties, with a group of assets collectively acting as collateral. Property developers and investors often buy several properties at once, so a blanket mortgage simplifies the process by combining those purchases into one loan.
Blanket mortgages can be refinanced just like any other mortgage. They generally contain release clauses that allow the borrower to sell one property in the group and keep the loans on the others. The mortgage usually must be repaid in full when the secured property is sold.
Blanket mortgages apply to both commercial and residential transactions, including the development and management of multifamily buildings and apartment complexes. People who buy and resell homes also use these loans.
“These are typically used for commercial purposes, but some residential landlords also use blanket mortgages to finance their rental property portfolios,” says Greg McBride, CFA, principal financial analyst at Bankrate.
The advantages and disadvantages of a blanket mortgage
Like any other type of mortgage, blanket loans have their pros and cons. Here are the main ones:
Strong Points
- Lower Closing costs: Taking out a bundled mortgage could potentially save you some money by not having to pay separate settlement costs and fees for each loan.
- Increased cash flow: You can also reinvest the money you save on settlement costs back into your portfolio to acquire more properties or launch additional projects.
- Easier management: With one loan, you have one interest rate, one monthly payment, one escrow account, and less paperwork.
- continuous: With a blanket mortgage, you can sell one property and not have to pay off the entire loan (although you do have to pay off the portion of the loan that was secured by that property — you can’t just pocket the sale proceeds).
Cons
- Higher payment costs: Although you only have to pay closing costs once, the closing costs of a comprehensive mortgage are often higher than the closing costs of a single mortgage.
- Increased down payment: A blanket mortgage may require a down payment of as much as 50 percent of the property’s total purchase price.
- Balloon payment: Blanket mortgages are often structured so that borrowers make low payments (sometimes interest-only payments) for a period of time followed by a larger lump sum payment. These large payments can be daunting if not planned for in advance.
- Seizure risk: If you use multiple properties as collateral, you risk losing everything if you default on your loan repayments.
How to Get a Lumberjack Mortgage
If you decide that a blanket mortgage is right for your portfolio, you’ll need to apply. But be aware that the process is different to applying for a regular mortgage. Here’s an overview of the steps:
- Find the right lender. Most large banks and credit unions don’t offer umbrella mortgages. You’ll probably need to look for a commercial lender that handles loans for businesses and investments. Some mortgage brokers also specialize in this type of lending.
- Check the rates and terms. Comprehensive loans can come with hefty fees, so down payments and fees are higher than with a regular mortgage. Comparison shopping is essential to understand what is standard and what is outside the standard.
- Review each lender’s borrower requirements. Like any other loan, to qualify for a comprehensive mortgage, you must meet minimum credit scores and maximum debt-to-income ratio (DTI) standards, though the standards may be stricter. If applicable, lenders will also look at your company’s credit rating and debt service coverage ratio (DSCR).
- Please fill out the application form. Gather all of your business documentation in advance (credit reports, tax returns, financial statements). Lending institutions will also need to see details of all the properties you want to lend to. This includes fair market value, renovation plans, and figures for the rental or lease income you expect to earn from the property.
