For much of the 20th Century, state-banking departments required only the mortgage company owner (or managing broker) to obtain a mortgage license, if they had any requirement at all. Back then, mortgage sales professionals (non-brokers) operated without governmental oversight. But all that changed during the early years of the 21st Century. Read on to learn how to start a mortgage company in the modern mortgage marketplace. First though, a word about the NMLS.
The Nationwide Multi-State Licensing System & Registry (NMLS)
The U.S. economy was humming along during the first few years of the 2000s. Home prices were soaring and financing was plentiful. However, beneath the surface of what appeared to be a poised economy, were ridiculously lenient financing products given to borrowers who clearly had no ability to meet monthly payments. This toxic financial combination ushered in the Recession of 2007-08. In retrospect, economic and financial experts have now confirmed how the unregulated mortgage industry played a significant role in this economic nosedive. Too many borrowers were being approved for –
- Ill-suited mortgage products.
- Complex mortgage products. Many borrowers had no idea how their interest-only, negative amortization monthly Adjustable Rate Mortgage’s interest rate would increase significantly.
In response to this nationwide economic predicament, the U.S. federal government passed SAFE — the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act). At that time, each state was put on notice. They had one year to establish state-level licensing regulations that met the minimum standards set forth by the Conference of State Bank Supervisors (CSBS). The SAFE Act also established the National Multi-State Licensing System & Registry (NMLS). The NMLS also acts as a mortgage originator data-bank that keeps track of all mortgage originators in the country.
How to Start a Mortgage Company
Develop a Comprehensive Business Plan
Perhaps the most important thing to do when you open a business is to create a comprehensive business plan. A business plan acts as a road map to help navigate the often-tricky waters of a new business. A comprehensive business plan includes-
- The way in which the business will legally operate. (i.e. a C-Corp, LLC S-Corp, Sole Proprietorship. The legal entity chosen will have legal and tax consequences. Seek advice.
- A dedicated timeline to address overall business objectives.
- Mortgage Licensee Plans.
- Company ownership & mission statement.
- The Business Model.
- Financing options.
- Industry analysis.
- Lending partners.
- A marketing plan.
- Solutions to regulatory issues.
- The business’ financial projections, among many other components.
Generally speaking, lending institutions won’t even accept a business-related financing application without the provision of a valid business plan. Let’s review several critical components of a comprehensive business plan.
Consult with Business Planning Experts
Many entrepreneurs and startup owners recognize just how important a business plan when opening a startup business. Many owners outsource this detailed work to business planning professionals. SmallBiz (Powered by LegalShield and GoSmallBiz) is one such company that offers comprehensive business and legal services for as low as $39 per month. This includes proprietary business plan creation software and unlimited consultations with business planning and legal experts. SmallBiz services are offered without a contract and thus, can be canceled at any time.
Understand Licensing Requirements
Preliminary, it is important to note that each state is responsible for establishing the minimum requirements for mortgage brokers and loan originators. While each state must comply with the criteria established by the CSBS, the state possesses the authority to further regulate the industry, should state lawmakers decide. A mortgage business can only operate legally if the business operates under the auspices of a mortgage brokerage license. The first step to understanding how to start a mortgage company is to research the mortgage broker requirements in the state you wish to open the business. Additionally, licensed mortgage brokers and originators must register their state license with the NML Service to receive an NMLS number. Check out the NMLS Resource Center’s Quick Guides & Policy Guidebook for further guidance.
Conduct Industry & Target Market Research
As you begin to learn how to start a mortgage company, remember to research the current mortgage/real estate market conditions under which you operate. These widely approved research reports are available (usually for a fee) as follows –
- Industry Reports.
- Industry Forums. – Each forum has its own rules and membership requirements.
- The U.S. Census Bureau American FactFinder tool. Check out the free insight obtained through census statistics.
Mortgage business owners are advised to not overlook the value of market data and industry statistics. In order to successfully learn how to start a mortgage company, one needs to define their target market. Be prudent, and take advantage of just how helpful this information can be.
Mortgage Company Startup Costs
A mortgage business is a service business. And while there is no need to purchase expensive equipment or a large inventory, a mortgage company will still need to cover the following startup expenses –
- Business licensing fees and required insurance premiums.
- An office space that meets your needs. This includes furniture and office support equipment.
- An integrated, cutting edge phone/computer system.
- A company website to allow borrowers to apply online and to attract new clients.
- Marketing costs. Consider opting for guerrilla marketing techniques if you are short on cash.
- Any other fee specific to the state in which you operate the mortgage business.
A properly prepared business plan will be quite helpful in calculating a mortgage company’s startup expenses.
Funding your Mortgage Business
From a business perspective, the startup costs for a mortgage company are considered moderate. However, for those opening a mortgage company without sufficient funding, you are advised to consider the following financing options that offer lenient lending underwriting guides –
- Using a ROBS transaction to transfer 401K monies to a new business.
- A Business Line of Credit without an income check.
- A No Documentation Business Line of Credit.
- A business loan that requires no collateral.
Managing your Mortgage Business
A mortgage business owner wears several hats while managing a mortgage company.
- As a business owner, a mortgage company owner is responsible for maintaining a legal business that complies with federal law.
- As a mortgage broker, a mortgage company owner is responsible for the actions of all the mortgage brokerage’s sales personnel and the office staff that supports them.
- As a salesperson, a mortgage company owner can also be responsible for maintaining his or her sales pipeline.
A modern mortgage company owner must be comfortable with digital technology as most of a mortgage financing business is conducted online, through digital messaging services, or the phone! Each customer is unique; like each real estate property and each mortgage scenario.
During that time, Judi began contributing to financial education endeavors and authoring CEU coursework to meet state/ARELLO standards. Judi has held a mortgage broker's, real estate, NASD Series 6 & 63, and LCAM licenses during her career. Recently completed two terms as the President of the condominium where she resides.
She is a passionate photographer/videographer/artist - skills she chooses for a variety of business ventures. When not writing about facts and figures, she remains balanced through the practice of Reiki and kindness.
Latest posts by Judi K. (see all)
- How to Start a Property Preservation Business - July 24, 2019
- 5 Landscaping Marketing Ideas to Grow Your Landscaping Business Now - July 19, 2019
- Franchise Business Financing Options: Startup & Working Capital - July 16, 2019