Blanket loans are a type of financing that covers multiple properties or parcels of land, allowing for the costs to be managed or secured by more than one piece of real estate. These loans are commonly used by commercial land developers or investors, but they can also be employed by individual consumers as a bridge between new and old properties and mortgages. For these consumers, a blanket loan enables them to pay for both mortgages simultaneously until they are able to sell the old property.
A key feature of blanket loans that makes them particularly useful for developers is the release clause. This clause allows borrowers to sell one or more pieces of real estate without needing to refinance the entire mortgage, which is a significant difference from traditional mortgages. In a standard mortgage, the borrower typically has to pay off the entire loan balance before selling the property that secures it.
Developers of residential properties find blanket loans especially advantageous, as they can finance large tracts of land where they plan to build. Once the loan is in place, it is secured by the entire piece of property, and the developer can subdivide the land and sell it in individual lots. To release part of the property from the loan’s security, the developer must use some of the proceeds from these sales to pay down the loan.
This is particularly useful when building subdivisions, as it allows the developer to purchase adjacent pieces of land while they are available, subdivide the total land into specific lots for home construction, and detach each sold home from the blanket loan without disrupting financing for the remaining project.
Consumers also benefit from blanket loans as they facilitate the transition from selling their current home to building or buying a new one. This approach is often more practical than maintaining two concurrent mortgages or obtaining a costly short-term bridge loan. Additionally, blanket loans can prevent the need to sell a property prematurely and move into a rental while searching for a new home.
These loans often come with a contingency clause, which stipulates that the new home’s mortgage won’t close until the existing home is sold. However, such clauses can be restrictive due to their time limits, potentially forcing a borrower to sell the home quickly, which might lead to a lower selling price or unfavorable terms.
Blanket loans mitigate this risk by providing an extended period within the clause to sell the old house. Sometimes, these loans are structured as interest-only payments for up to 12 months before amortization begins, giving the seller ample time to secure a good price and easing the mortgage burden.
One downside to blanket loans for individuals is that they have become harder to find since the real estate crash and Great Recession of 2009. However, their benefits include flexibility and efficiency in financing. For consumers, this means managing a single mortgage payment instead of two. For developers, blanket loans eliminate the need for frequent refinancing as portions of the property are sold. If a developer defaults on the loan, the bank takes control of all remaining properties securing the loan.
