The Definition of a Blanket Mortgage
Mortgages can be used for many purposes beyond buying houses, including investment and large projects when contractors need substantial funds. Sometimes it is better for a developer or a wealthy individual to take out mortgages on multiple pieces of property to raise money. In this case, many lenders allow borrowers to use a blanket mortgage instead of more common loans.
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Definition
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A blanket mortgage is a loan that uses property as collateral, but applies to more than one type of property. An individual trying to raise a large sum of money may use a blanket mortgage on two different houses to acquire a much larger loan. One of the most common uses is in real estate development, where developers take out blanket mortgages on multiple lots at the same time.
Process
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A blanket mortgage is similar to a normal mortgage, but fees tend to be higher, and they can sometimes take longer, since the lender needs to investigate multiple homes or an entire tract of land instead of just one property. Since large developers often use blanket mortgages, lenders tend to have working relationships with borrowers who make blanket mortgages, which can streamline credit checks and make some parts of the process more simple.
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Release Provision
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A release provision is a vital part of the blanket mortgage that allows developer control over individual parcels of land even though the mortgage applies to the enter area. This allows developers to use the blanket mortgage, but sell specific lots to buyers without losing the entire mortgage.
Benefits
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When used correctly, blanket mortgages give developers the money they need to build on land, creating houses and subdivisions that they can then sell to other borrowers. Developers are not usually able to access enough money for these large projects with mortgages on all the lots of the property. A blanket mortgage saves time and processing fees for the developer.
Considerations
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Using a blanket mortgage to build on developing land is a balancing act. Since developers are getting a loan for the entire tract of land at the same time, they need to be confident they can sell all or most of the lots within a certain time frame, which gives them the money they need to pay the mortgage off. If this balance does not work--if the housing markets falls--then the developer is stuck with a sizable mortgage without a way to pay it off.
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References
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