The legalization of marijuana in the United States has continued to progress at a state level. More than ten states have made it fully legal while others continue to decriminalize and approve medical use of cannabis. As a result, many investors and entrepreneurs have utilized the state legalization as an opportunity to create cannabis-based businesses.
With jobs in the cannabis market increasing, what happens if you want to buy a home and work for one of these state-legal businesses? Well, it gets tricky. Because, at a federal level, marijuana is still fully illegal.
Question: Can I get approved for a mortgage with income derived from the marijuana industry?
Simple answer: Very likely no. For federally backed loans, salaried or self-employed borrowers who have income earned from any facet of the marijuana industry do not have eligible income. This applies to both medical or recreational marijuana.
HUD’s guidelines state in Section “c” under “Definition of Effective Income” under “i. General Income Requirements,” “The Mortgagee may only consider income if it is legally derived and, when required, properly reported as income on the Borrower’s tax returns.”
Since marijuana remains illegal under federal law, any income derived from the cannabis industry cannot be considered as effective income for purposes of underwriting a loan. 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.
Since FHA and VA are government entities, they will not consider cannabis income. Fannie Mae and Freddie Mac will also not allow cannabis income to be used to qualify - with very few exceptions. Mortgage lenders who offer loan products under these organizations must follow their specific guidelines and will likely deny home loans to cannabis workers.
The only exception would be Fannie Mae’s 3% down payment assistance program. This program allows W-2 tax income but not independent contractors. If you own less than 25% of a cannabis business, you are considered an independent contractor and may qualify. However, mortgage lenders who approve loans for borrowers with cannabis-derived income risk losing their FHA licensing.
The more complex answer: In rare instances…maybe.
There are very select situations where this may work out. Banks cannot handle money from a marijuana business since they can be charged for money laundering (marijuana is considered a “Schedule 1” drug by the federal government). As you’d expect, taxes and reporting this income is just as complex. But, in states where marijuana is fully legal, there have been situations where credit unions and lenders may approve borrowers with marijuana industry derived income and not discriminate. However, those home loans cannot be federally backed loans such as FHA or VA.
There is a chance in states where marijuana is fully legal to find an alternative lender or bank who will offer you a mortgage. You’d have the best luck when you are looking in states who have been working with this issue for a while. Currently, Washington, Oregon, California, Nevada, Colorado, Michigan, Maine, Vermont, Massachusetts, and District of Columbia are the only U.S. states where it is fully legal. You can see a map of each state’s status here.
When home buyers find a lender or bank who is willing to work with them, these alternative lending options tend to have higher interest rates to cover the risk they are undertaking. Your other option would be to find a co-signer who can offset the income mortgage companies cannot use. If you do find a lender willing to work with you, you will need to verify your income and be employed in the industry for at least two years.
This mortgage situation will continue to pop-up. Without a doubt, the cannabis market is growing - whether medical marijuana or recreational. In fact, the U.S. government passed the Farm Bill in 2018, which legalized hemp and hemp-based cannabidiol. By 2020, reports believe there will be nearly 300,000 people working directly in the marijuana industry. More entrepreneurs and businesses will take advantage of this trend. At any point one of these workers wants to buy a home, they will face an uphill battle with the disconnect between the federal and state governments.