Blanket Mortgages: Financing Multiple Properties with One Loan

A blanket mortgage is a single loan secured by two or more properties, with one note, one payment, and one maturity date. Because every property secures the whole debt, a default lets the lender foreclose on all of them, not just the one with a problem. To sell or refinance one property without paying off the entire loan, you need a release clause that sets the price, usually more than that property's share of the loan, for removing its lien. The usual sources are banks, credit unions, and commercial lenders that keep their loans.

For how blanket loans fit among other financing choices, see tips for getting approved for an investment property mortgage.

How cross-collateralization works

Cross-collateralization means each property is collateral for the full loan. The lender records its mortgage or deed of trust against every property in the group, in each county where one sits.

The loan amount is built property by property. Federal bank examiners' guidance says that when a loan is secured by a pool of properties, the maximum loan is the sum of each property's value, less any senior liens, times the loan-to-value (LTV) limit for that property. Four rentals worth $240,000, $220,000, $180,000, and $160,000 total $800,000, so at a 75% limit the loan can be up to $600,000.

What this means in a default:

• One missed payment is a default on the whole loan, and the lender chooses which properties to foreclose on to collect, including ones that are paying their way.
• A personal guaranty adds your own assets. If you sign one, the lender can also look to you, and examiner guidance tells banks to weigh a guarantor's assets and other obligations. Whether the lender can collect a shortfall after foreclosure depends on your state's law and the loan documents.

With separate loans, a vacancy or repair problem on one house usually affects only that loan, unless the loans contain cross-default clauses, which let a lender treat a default on one loan as a default on others it holds. Check for that clause before you assume the loans are separate. A blanket loan trades that separation for one closing and one payment, so keep cash reserves that cover the whole loan's payment, not one property's share.

Release clauses and how a release price is set

A release clause, also called a partial release provision, lets you remove one property from the loan by paying a set amount. Without one, you have no right to a release, so selling any property means paying off the entire balance unless the lender agrees to a release on its terms.

Lenders start with each property's allocated loan amount, its share of the loan, usually in proportion to its value. The release price is then set above that share. The federal bank examiners' handbook describes this method for construction loans on multi-lot developments: a release price set at a multiple of each lot's share, so the loan is paid down faster than the collateral leaves. Its example uses 125%, which pays the loan off by the time 80% of the lots are sold (100 divided by 80). A lender on a group of rentals sets its own percentage, and it is negotiable.

Example using the four rentals above and a release price of 120% of the allocated amount:

At a release price of 100%, you would keep $45,600 and the remaining loan would stay at 75% LTV. The higher release price protects the lender and lowers your remaining balance, but it can leave you little cash from a sale.

Negotiate these points before you sign:

1. The release percentage for each property, and whether it differs by property.
2. Conditions on a release, such as a requirement that the remaining properties still meet the LTV limit or a minimum debt service coverage ratio. The loan agreement defines that ratio; bank examiners compute it as net operating income (rent minus operating expenses) divided by the yearly loan payments, so ask for the exact formula. Examiner guidance tells banks to recheck the LTV limit whenever properties in the pool are substituted.
3. A substitution right to swap a new property in for one you sell.
4. What happens to the payment after a release: whether the bank recalculates it on the lower balance or keeps it the same. Unchanged payments produce an earlier payoff only if they repay the reduced balance before maturity; otherwise, the remaining balance is due as a smaller balloon payment on the original date.
5. Release fees, such as a new appraisal or the lender's legal costs, and whether a prepayment penalty applies to the release payment.

Who offers blanket loans and on what terms

Conventional loans that follow Fannie Mae's rules lend only to individuals and stop at 10 financed properties, so an investor who wants an LLC as the borrower or a larger group under one loan goes elsewhere. Look to:

• Community and regional banks and credit unions that keep loans on their own books. See portfolio loans explained for how these lenders underwrite.
• Commercial lenders for larger rental groups or apartment buildings, covered in commercial real estate loans.

Arch Mortgage Funding's guidelines for DSCR loans (loans approved on the property's rent instead of your income), for example, qualify each loan on one property's rent and cap any one borrower at 10 loans or $5 million.

Terms are set by the lender, so get a written term sheet. Federal Truth in Lending rules treat a loan on rentals you do not live in as business credit, so the consumer disclosure forms are not required. Expect the lender to review:

• Each property's value and rent, since the loan amount is the sum of the per-property limits.
• Your global cash flow, the combined income and payments from all your properties, businesses, and personal debts, which examiner guidance tells banks to analyze.
• The term and amortization. A bank can figure payments over 20 to 30 years but set a shorter term, such as 5 years, after which the balance comes due or the bank re-underwrites the loan. The handbook uses a 5-year term with a 20-year payment schedule as its example.

When one loan beats separate loans

A blanket loan tends to fit when:

• You are buying several properties from one seller at once. One loan can close the whole package together, which helps when the seller will not split it.
• You own several properties free and clear and want to borrow against them together to buy more. The power of leverage in real estate covers how much debt a portfolio can carry.
• You have run out of conventional options and want one bank relationship for a growing group of rentals.

Separate loans tend to fit when:

• You expect to sell properties one at a time soon, since each release price takes cash from each sale.
• You want a 30-year fixed rate with no balloon on each property.
• Your existing loans carry low rates. Folding $400,000 of 4% loans into a new 7.5% blanket loan raises the yearly interest from about $16,000 to about $30,000, or about $14,000 a year for the convenience of one payment.
• One property is riskier than the rest, such as a house that needs major repairs, and you want a problem there kept away from the others.