What Happens When Buying a Home With a Blanket Mortgage?

When buying a home, buyers typically expect a straightforward transaction with a single loan. However, some properties are part of a larger financial arrangement known as a blanket mortgage. This loan covers multiple properties under one agreement, which can introduce unique complexities. Understanding these intricacies is important for a smooth purchase and to protect one’s investment. This article explains what a blanket mortgage entails and the process when a property under such a mortgage is sold.

What is a Blanket Mortgage?

A blanket mortgage is a single loan secured by more than one piece of real estate. Instead of obtaining individual mortgages, a borrower uses the collective value of multiple properties as collateral for one larger loan. While it covers multiple assets, individual properties can be sold without requiring the entire mortgage to be paid off.

Real estate developers frequently use blanket mortgages to finance large tracts of land for subdivision into individual lots. Investors acquiring multiple rental units or house flippers purchasing several properties for renovation and resale also opt for blanket loans. Consolidating financing can streamline the lending process, potentially saving on closing costs associated with multiple separate loans.

How a Sale Proceeds with a Blanket Mortgage

When a single property covered by a blanket mortgage is sold, the transaction involves a partial release. A partial release is a formal agreement from the lender to remove one specific property from the blanket mortgage’s lien. This action ensures the buyer receives a clear title to the property, free from the encumbrance of the larger mortgage. Without a partial release, the blanket mortgage lien would remain on the property, potentially making it difficult for the new owner to secure financing or resell the home.

The proceeds from the sale of the individual property are applied towards reducing the outstanding balance of the blanket mortgage. This payment, a predetermined amount or a percentage of the sale price, facilitates the partial release process. If the sale price is substantial enough, the entire blanket mortgage might be paid off. The escrow or closing agent plays a central role in this process, facilitating the financial transaction and ensuring that the necessary documentation for the lien removal is correctly processed and recorded.

Most blanket mortgages include a “release clause,” which outlines the conditions under which individual properties can be released from the loan’s collateral. This clause allows the borrower to sell a property and apply its proceeds to the loan, while the remaining properties continue to secure the mortgage. The lender must approve the partial release, requiring the borrower to submit specific documentation, such as a survey of the property and an updated appraisal to ensure the remaining collateral adequately secures the loan.

Buyer Safeguards and Due Diligence

For a home buyer acquiring a property under a blanket mortgage, thorough due diligence is important. A comprehensive title search, conducted by a reputable title company or closing attorney, is a crucial step. This search examines public records to uncover any existing claims, liens, or encumbrances, including a blanket mortgage. Identifying such issues early allows for their resolution before the sale is finalized.

The title company or closing attorney plays a significant role in verifying the blanket mortgage is properly addressed. They confirm whether a partial release has been secured, or if the entire blanket mortgage will be paid off at closing. This oversight helps ensure a clear and unencumbered title is conveyed to the buyer, meaning the property is free from any financial or legal claims.

Buyers should confirm the partial release document is officially recorded in the public records of the county where the property is located. This recording provides legal notice that the specific property has been released from the blanket mortgage lien. Without proper recording, the release may not be legally binding, potentially leading to future title complications. Engaging experienced real estate professionals, such as attorneys and title experts, can provide buyers with guidance and protection throughout this transaction.