'Blanket Loans' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
Blanket loans are those which cover multiple properties or parcels of land. They handle the costs for or can be secured by more than a single piece of real estate. These are most typically employed by commercial land developers or investors. For individual consumers, they can be utilized as a type of bridge between new and old properties and mortgages. For these consumers, such a blanket loan will make it possible to pay for both mortgages until the owner reaches the point of selling the old property.
The feature that makes these mortgages most useful for developers is their release clause. These permit the borrowers to sell a single or even several pieces of real estate without the need of being forced to refinance the mortgage. This makes them significantly different from traditional mortgages. Normal mortgages make borrowers completely pay down their loan balance before they can sell the property which secures them.
For developers of residential properties, they find these blanket loans particularly helpful. They employ them to pay for large tracts of land on which they will build. When it is time for the loan to fund, it becomes secured by the full piece of property. The developer is allowed to subdivide his property and sell it in individual lots. For part of the security to be released, the developer must utilize some of the sale proceeds to pay down part of the loan.
This is helpful when builders are constructing subdivisions. Such a developer could put the blanket loan to use to buy the consecutive pieces of land while they are available. The developer would then be able to subdivide the total land into specific lots for building houses. With each home that he finishes and sells, the property becomes detached from the blanket loan without the financing having to be disrupted on the remainder of the development project.
Consumers also find these types of blanket loans helpful in making it possible to transition from the sale of their current home to the building or buying of the new house. This makes much more sense than having two concurrent mortgages or obtaining a more costly short term bridge loan. It can also help them so that they do not have to sell the property early and move into a rental while they look for a property to purchase.
These kinds of blanket loans are often governed by a contingency clause. These clauses detail that the newly purchased house and its mortgage will not close until the person is able to sell the existing home. The problem with such a contingency clause is that they have limited time frames on them. They may force a borrower into selling the home in a panic in order to meet the clause expiration date. This can lead to a lower selling price or disadvantageous terms on the sale.
Blanket loans get around such a dilemma by providing the borrowers with an extended period of time in the clause to sell their old house. Sometimes they are arranged as interest payment only loans for a full 12 months before amortizing starts. This gives the seller a sufficient time period to sell the house for a good price and reduces the overall burden of the mortgage at the same time.
The main downside to blanket loans for individuals is that they are significantly harder to find since the real estate crash and Great Recession of 2009. Their advantages include both flexibility and efficiency in financing. For an individual consumer, this means a single mortgage payment rather than two. Developers do not have to worry about constantly refinancing their property debt as they sell off parts of the property. Should a developer default on his loan, the bank simply assumes control of all remaining property which secures the loan.
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