It's a frustrating reality for many cannabis industry workers: despite holding down steady jobs and earning good incomes, they find it difficult or even impossible to secure mortgage loans. Why is this happening? Why do mortgage lenders deny home loans to cannabis industry workers and Cannabis business owners?
In this article, we'll explore the surprising reasons behind this phenomenon, as well as some potential solutions for those who are affected. So whether you're a budtender, a grower, or a dispensary owner, read on to learn more.
I’m a licensed Mortgage Loan Originator, and we are a full service Cannabis Mortgage Lender, meaning that we do offer mortgage financing to both W2 workers as well as business owners in the Cannabis industry.
One of the most common and heart-wrenching phone calls that we get in our office are from people who work in the Cannabis industry who are in the middle of trying to buy a home. They get almost all the way through the process---they pay for the home inspections, appraisals, complete their loan applications, get their lender everything that was required, and then, surprise! THE DAY BEFORE CLOSING, their bank calls them and tells them, “Sorry, we can’t approve your loan. We just learned that you work in the Cannabis industry, so we’re denying your loan. Have a nice day.”
Shocking, right? You would think that they would know this, but unfortunately many banks—and loan originators simply don’t understand the implications until it’s too late. Our industry should do better, but that’s another discussion.
At first glance, it might seem like a simple case of discrimination. After all, cannabis industry workers are legal employees in many states, and their jobs are no different than those in other regulated industries. So why the stigma?
There are actually several reasons why mortgage lenders might be hesitant to approve loans for cannabis industry workers, including:
That’s the abridged answer.
For the more in-depth answer, let’s follow the logic here for a moment:
Firstly, the Federal Government has one position on the topic of Cannabis: it’s a classified as a Schedule 1 substance.
Schedule 1 substances are defined as “drugs with no currently accepted medical use and a high potential for abuse.” In the Federal Government’s eyes, Cannabis shares this classification with demonstrably more dangerous substances such as heroin, lysergic acid diethylamide (LSD), marijuana (cannabis), 3,4-methylenedioxymethamphetamine (ecstasy), methaqualone, and peyote. Regardless of their reasoning, this is how our government currently views Cannabis.
The banking system is managed by the Federal Reserve and managed via oversight from several different Federal Regulatory bodies. Banks, credit unions and mortgage lenders are all intimately interconnected with the Federal government through this system….sort of like one big, happy family.
Mortgage lending is a part of this family and is one of the most heavily-regulated sectors of the financial services industry. Mortgage lenders already have great deal of interdependency on the Federal system for support, insurance, and other guidance in their day-to-day affairs.
Mortgage lenders simply can’t afford to ‘make waves’ with even the appearance of being at odds with the Federal government, which includes their position on Cannabis. If a mortgage lender makes a bad judgment call and funds a loan that they cannot sell to their banking servicer partners, the litany of consequences can be cripplingly expensive for the lender. I could go deeper into this subject, but suffice it to say, the losses can rank in the tens of thousands or even hundreds of thousands of dollars per loan depending on the circumstances.
If a mortgage lender gets it wrong on the question of Cannabis, the losses can be devastating.
I’ve heard it jokingly said that “a bank or lender might have an easier time doing business with a customer who sells cocaine (which is a schedule 2 substance) for a living, than one who sells Cannabis for a living.”
So even if your state law allows legal Cannabis (medicinally or recreationally), the members of the banking and lending systems are likely to take their cues from the Federal government and deny the loan application in the same manner they would for a cocaine dealer.
When it comes to controlled substances, the Federal Government prefers to speak with one, consistent voice; and any of their affiliated branches generally choose to agree with the Federal government’s position, so their business activities remain operating smoothly.
After all, no one wants to risk their entire business on a relatively small number of lending decisions that might have dire ramifications on their Federal or State Charter; so to them, denying a few mortgage approvals to Cannabis workers or business owners is a small price to pay.
So in essence, it’s a sort of convoluted messaging problem. Until the Federal government changes it’s position on Cannabis as a Schedule 1 substance, this is the current state of affairs.
Now let’s dig a little deeper into Mortgage loans. There are many types of loans in the marketplace, but the most common types of traditional loan programs are Conventional mortgage loans and Government-insured mortgage loans.
CONVENTIONAL MORTGAGE LOANS are the most common, and there are two major purveyors of these loans on the secondary market: Fannie Mae (FNMA) and Freddie Mac (FHLMC) which are Government-Sponsored Enterprises (GSE’s). They are both technically private but are sponsored and influenced with Federal dollars. These two agencies each write their own rule book of underwriting guidelines that defines the parameters of each loan type. Another major player in Conventional lending are the PMI (Private Mortgage Insurance) companies, which are insurance companies that insure mortgage loans, protecting mortgage lenders against the risk of borrower default. There are currently six of them in the United States. (MGIC, Radian, Essent Guaranty, National MI, United Guaranty, and Genworth) PMI is conventional loan requirement when the borrower's down payment is less than 20% of the home's purchase price....and their insurance is there to protect the lender against losses from borrower default.
GOVERNMENT-INSURED LOANS include programs such as FHA (Federal Housing Authority), VA (Veterans Affairs) or USDA (United States Department of Agriculture).
For these loans, there are no PMI companies, but instead, the Federal government issues its own insurance policies to protect the lender against borrower default. They also issue their own underwriting guidelines and loan standards.
For Government-insured loans, here is their official position on Cannabis:
The short answer is yes, but it will depend on the lender.
For Conventional loans, the subject of Cannabis is…murky. For instance, there are two types of Conventional loans: those underwritten to standards created by Fannie Mae (FNMA), and those underwritten to standards written by Freddie Mac (FHLMC). And these two agencies have differing opinions on whether Cannabis income is acceptable.
Regardless of whether Fannie Mae accepts Cannabis industry income, many lenders prefer the safer route of denying these loans. They create their own extra rules and restrictions that go a step beyond that of typical rules, which are called Credit Overlays.
The type of Conventional mortgage lenders who tend to lend to Cannabis industry workers will generally have a more sophisticated license classification known as a “Seller/Servicer”, meaning that they fund their loans using their own money; and they also have the capability to A) service mortgage loans themselves as well as B) sell the loans directly on the secondary market.
When they do lend to Cannabis workers, lenders will only lend to W2 wage earners. Unfortunately, business owners are not eligible for Conventional loan programs at the present time, but there are options available to Cannabis business owners, which we’ll cover in a moment.
Government-insured loans include programs such as FHA (Federal Housing Administration), VA (Veterans Affairs) or USDA (United States Department of Agriculture). For these loans, there are no PMI companies, but instead, the Federal government issues its own insurance policies to protect the lender against borrower default. They also issue their own underwriting guidelines and loan standards.
Here is the official position for each type of government-insured loan type:
Here's a quick chart to show which traditional loan programs accept Cannabis industry income.
As we discussed earlier, there ARE solutions. 😎 🌿
Cannabis industry W2 workers can qualify for a Conventional loan with select lenders. We offer a Conventional loan program that has competitive interest rates and terms. The minimum down payment ranges from 3% - 5% of the purchase price. It’s the same type of conventional loan you might find at a local bank or credit union, but without any restriction on your type of income. 🌿
If you’re a small business owner of a Cannabis company, including doctors, dispensaries, cultivators/growers, distributors, transporters, bakers, bankers or any other the many cannabis companies involved in the supply chain, you have mortgage options too. 🌿
The available loan options are a relatively new class of mortgage loans called Non-Qualifying Mortgages, or “non-QM” for short. With these types of loans, flexibility is at the forefront, which often includes Cannabis industry self-employed income.
These loans are designed in large part for business owners. Unlike traditional loans that only use the income from your tax returns, these programs allow the lender to choose which approach to use…including the tax return approach, the Bank Statement Loan approach, the Profit & Loss Statement loan approach, and the 1099 Income approach. This gives the business owner an advantage in the process for many reasons.
Many business owners across many industries often employ a sophisticated tax strategy to legally minimize their legal tax burden, and many Cannabis business owners are no different.
The minimum down payment begins at 10%-15%, they have stricter credit score requirements, and the interest rates are generally about 1% - 2% higher than the typical Conventional loan.
Keep in mind, not every non-QM lender will not lend to Cannabis business owners. We lend to Cannabis Business owners, and we offer a choice of income calculation approaches, including the traditional tax return approach, bank statement income, 1099 income, and Profit & Loss Statement income.
The minimum down payment is 10% to 20% and we accept credit scores as low as 620.
As you can see, mortgage lenders may deny home loans to cannabis industry workers due to several reasons, including Federal laws, risk factors associated with the cannabis industry, and public perception. The federal government views cannabis as a Schedule 1 substance, which puts pressure on mortgage lenders who are regulated by the federal system to avoid any appearance of being at odds with the government. Even if cannabis is legal under state law, mortgage lenders are likely to deny loans to cannabis industry workers to avoid the risk of getting involved in a business that could be shut down by the federal government at any time.
But all is not lost.
There are solutions, and we can help. We don't discriminate based on your industry. To us, WHERE you work doesn't matter. What matters is that you're home. 🏡🌿
Yours in successful homeownership,
Unconventional Lending Program Director
About the Author:
Derek Bissen is a licensed Mortgage Loan Originator with over 25 years of experience in the industry. Derek is a self-employed lending expert who is known for his ability to work with borrowers who have substantial wealth and non-traditional lending needs. He is a creative loan structurer and specializes in portfolio lending, asset-based lending, bank statement lending, as well as traditional loans such as Conventional, FHA, VA, and first-time homebuyers.
Derek's expertise in the mortgage industry is unparalleled. He is a trusted advisor to his clients, providing them with customized loan solutions that meet their unique financial goals and needs. His vast experience and knowledge make him a valuable asset to anyone looking to purchase a home or refinance their existing mortgage.
As a highly-experienced loan originator and author, Derek is committed to sharing his knowledge with others. He regularly provides valuable insights and advice to readers looking to navigate the complex world of mortgage lending. His articles are informative, engaging, and backed by years of hands-on experience.
With his wealth of knowledge and dedication to his clients, he is the go-to source for all your mortgage lending needs. If you're looking for a reliable and trustworthy mortgage expert, contact Derek today to learn more about how he can help you achieve your financial goals.