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Ryan G. WrightJan 28, 2021 12:00:23 AM6 min read

Are Mortgage Lenders State Specific?

At The Investor's Edge, we work with real estate investors from all over the country. As a result, people often ask me questions about a particular geographic area. For instance, are mortgage lenders state specific?

Traditional lenders require state licenses to provide owner-occupied mortgages and most focus on a particular area. Investment lenders fall under different rules. They need business licenses where they operate but not state specific lending licenses. They typically focus on a certain area, as well.

I’ll use this article to discuss some more of the state specific considerations for mortgage lenders.

State Specific Rules for Owner-Occupied Mortgages

I’ll begin with a discussion of rules governing traditional mortgage lenders. These include banks, credit unions, and other lenders that provide home mortgages to primary residence buyers. That is, they lend to owner-occupiers.

These lenders are not state specific, per se. In other words, just because a bank provides mortgages in one state does not mean it can’t lend in another state, as well.  Typically, lenders have operating regions. For smaller lenders, this may be a single state, but it’s not uncommon to see a multi-state region. On the other hand, larger lenders may provide mortgage services throughout the country.

However, these traditional mortgage lenders do need to be licensed in every state they operate. Depending on the particular lender’s business license, this could be a state or federal license. These licenses are administered by the Nationwide Multi-state Licensing System, or NMLS. This organization serves as the only system of licensure for mortgage companies and mortgage loan originators.

The federal government—in conjunction with state and local agencies—mandates this mortgage lender licensing as a way to protect homeowners. For most Americans, primary homes represent the largest purchase of their lives. Unfortunately, in the past, unscrupulous lenders took advantage of homebuyers by providing predatory or downright fraudulent mortgages.

By mandating licenses, the government establishes a regulatory and ethical oversight framework for traditional mortgage lenders. Most first-time homebuyers are not financial or investing experts. Rather, they’re people with any number of different jobs who just want to buy a home. As such, the government assumes this oversight role to protect them during the homebuying process.

State Specific Rules for Investment Mortgages

Next, I’ll discuss the rules governing lenders of investment mortgages. These include hard money lenders and private lenders. These entities provide loans to real estate investors to purchase properties to renovate and then resell.  As a result, they issue loans that traditional mortgage lenders wouldn’t originate. The traditional lenders described above exist to support homeownership, so homes need to be habitable.

Investment mortgage lenders, on the other hand, lend money to purchase and rehab distressed properties. They vet borrowers to confirm that they have the experience and knowledge necessary to successfully renovate and resell a house. Accordingly, they only lend to sophisticated and experienced investors. In the eyes of the government, these investors understand the risks of borrowing, so they require less oversight. For example, if an investor acquires a hard money loan and defaults, the government assumes it was his or her fault—not the lender’s. In other words, the investor should’ve known better than to take the loan.

Due to this limited need for oversight, the government does not mandate state specific mortgage lending licenses for hard money lenders and private lenders. However, these entities do need regular business licenses wherever they operate. As a result, most of these investment lenders choose to operate in a specific region—largely for business and marketing, not licensing, purposes.  However, if desired, these investment lenders could fairly easily file business license paperwork in a new state and begin lending there. In that respect, no, they are not state specific.

Finding a Mortgage Lender for Your Situation

Having outlined the above, what’s the best way to find a mortgage lender? First, you need to ask yourself what you need—a mortgage for a primary residence, or a loan for an investment property?

If you want to purchase a primary residence, I personally recommend using one of your local credit unions. First, these organizations tend to offer better rates than nationwide banks and lenders.  Second, I believe they have a far more intimate understanding of the local market—and can better support your needs. Of note, these smaller organizations tend to have more room for flexibility. A nationwide lender has rigid internal rules and business policies, limiting its ability to adapt a product for your needs. While staying within NMLS rules, local lenders typically have far more flexibility.

On the other hand, if seeking a loan to fix & flip a property, you’ll need to use a hard money lender or private lender. As stated, traditional lenders will not provide you mortgages to purchase distressed properties, while these investment lenders will. In this rehab process, investors use an investment loan to purchase a distressed property, fix it up, and then list it for sale to let a traditional buyer purchase it. In that sense, house flippers feed directly into homeownership. They take a house that a homeowner couldn’t otherwise finance, and they bring it to a quality standard to qualify for a traditional mortgage.

How to Find a Hard Money Lender

If seeking a hard money lender, what’s the best strategy? In general, these lenders will lend you funds based on some percentage of the property’s loan-to-value, or LTV. You’ll want to know what percentage the lender offers, and you’ll need to do some digging to determine which value they use. With distressed properties, hard money lenders can use a property’s as-is value or after-rehab value (ARV), as determined by a licensed appraiser. Additionally, some lenders base value on the purchase price. Bottom line, how a lender determines value will dictate the size of the loan. For instance, 70% of a $300,000 ARV gives you a $210,000 loan, while 70% of that same property’s $175,000 as-is value gives you a $122,500 loan—a huge difference.

Every hard money lender does things differently, so I can only talk about our system. At The Investor's Edge, we offer 70% LTV hard money loans based on a property’s ARV. We work with borrowers to get a property appraised, and then we’ll originate a loan according to the results. Following the above example, we would offer a hard money loan of $210,000—70% of the property’s appraised ARV. As such, if your budget comes in less than $210,000, you could receive 100% financing on the deal. On the other hand, if you have a budget greater than $210,000, you’d have to bring the difference in cash or other financing.

In our experience with hard money lending, we’ve frequently seen investors focus too much on the interest and fees associated with a loan—rather than the amplified returns leverage provides. Yes, you should absolutely look to find good rates on these loans. But, it’s more important to understand the role the loan, itself, plays in driving your returns.

Here’s a basic example. If you invest $150,000 of your own cash in a rehab and sell that property for $200,000, you’ve made a nice 33% return on investment ($50,000 / $150,000). Now, let’s say you put $10,000 of your own into the deal and borrowed the other $140,000, paying 10% interest for a year—$14,000 total. You’ve now decreased your profit by $14,000 in interest costs. But, you now have a 360% return on investment ($36,000 / $10,000)!

This is an oversimplified example. But, investors should take away the incredible role mortgages can play in amplifying investment returns.

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