Disclaimer: This column is written for educational purposes only. It does not provide specific legal advice and does not create an attorney-client relationship. This column should not be used as a substitute for competent legal advice from a licensed attorney in your state.
It's no secret that cannabis businesses have struggled for years to gain access to banking and other financial services. What's not often talked about is the fact that the banking crisis facing the industry also affects nearly a quarter of a million people who are employed in the cannabis industry. This week we're taking a look at whether cannabis workers can use their income to qualify for loans and mortgages.
Over the last several years, cannabis workers have been sharing frustrating stories of instant loan denials. A compliance officer at a Colorado dispensary recently told The Coloradoan that she was denied a car loan because she earns income from a business that's illegal at the federal level. She faced the bleak choice of either lying about her employment and submitting a fraudulent loan application, or trying her luck by disclosing the truth about her income.
So, can cannabis income be used to qualify for a loan or mortgage? The short answer: potentially yes, but options are limited. Any time someone is applying for financing for a car, home, or personal loan, they're required to disclose their income and provide documentation such as pay stubs and tax returns. Income is taken into account to determine the potential borrower's debt-to-income ratio, which indicates their ability to repay the loan. In the absence of a disqualifying level of debt, a borrower with an appropriate amount of verified income from a legal source can qualify for many loan products. The tricky part comes down to what a lender considers to be "legal" income that can be counted for the purposes of qualifying.
If you choose to work with a large bank to get a loan, you'll quickly run into roadblocks. All banks are subject to federal law, whether they're a national bank or state-chartered. Large banks like Bank of America or Wells Fargo are also regulated by the Federal Deposit Insurance Corporation, which insures deposits of up to $250,000 against bank failure. Financial institutions that are FDIC-insured must adhere to federal law, which recognizes cannabis as an illegal Schedule I drug. As a result, just as FDIC-insured financial institutions won't bank cannabis money, they also will not lend to consumers based on income derived from an illegal source. If a bank violates federal law, it could lose its charter — a risk most banks are not willing to take.
On the other hand, some credit unions have no problem lending to workers with cannabis-derived income. While they generally will not make commercial loans to cannabis businesses, they'll lend to qualified borrowers with stable W-2 income from a cannabis business. A credit union's likelihood of lending to cannabis employees varies depending on their risk tolerance.
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Many mortgage loan originators will underwrite a new loan and immediately sell it to an investor, freeing up the capital to originate another loan for the next consumer. If the originating lender is not able to sell the loan to an investor, the capital will be tied up in the loan and that lender assumes the risk associated with that loan. As a result, many lenders will underwrite loans only if they know they can sell them. Lenders who want to sell their loans to investors such as the FHA, VA, Fannie Mae, or Freddie Mac must follow the guidelines set forth by these investors. As government entities, FHA and VA absolutely will not consider cannabis income due to federal illegality. Generally, neither Fannie nor Freddie will allow cannabis income to be used for qualification, with a few exceptions. Lenders who sell to any of these investors will follow guidelines and deny loans to cannabis workers.
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Other lenders, called "Portfolio lenders," keep a certain number of loans in their portfolio instead of selling to investors. In doing so, they assume the risks associated with these loans. Lenders who retain some or all loans rather than selling them to investors will have more discretion to consider cannabis income to qualify borrowers. Most Portfolio lenders offer an adjustable interest rate, which is not ideal, but can be a better option than no loan at all. Additionally, without good credit a borrower may be required to commit to a down payment of greater than 10% of the purchase price of the property.
For lenders that will consider cannabis-derived income, there are some common guidelines. W-2 employees may use cannabis income to qualify for a loan or mortgage. Owners of cannabis companies will have a harder time because the business itself poses a greater risk to the lender than income earned as an employee. There are financing options for those who own less than 25% of the company, but they may be even more limited than if the person was merely collecting a salary from the company. Self-employed business owners will have to show 24 months of self-employment income with the same business in order to qualify.
When looking at particular mortgage loan products, keep in mind that cannabis income cannot be used to qualify for federally-backed loans such as FHA or VA. Generally, Fannie Mae and Freddie Mac also disallow the use of cannabis income to qualify. However, one exception is Fannie Mae's 3% down payment assistance program, which allows W-2 tax income but not independent contractor 1099 income. Those who own less than 25% of a cannabis business are also considered independent contractors and may qualify.
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Additional restrictions accompany some of the limited options available to cannabis workers. For example, if you're able to qualify using one of the few programs available, you may be required to place a larger down payment or commit to a higher interest rate due to the risk involved. If you're a cannabis worker considering taking out a loan or mortgage, it may benefit you to speak with a loan officer licensed in your state who can provide specific guidance and options for you.