How Much Money Should a Mortgage Broker or Lender Put into Its Business?

The answer to this question is different state by state and whether you are a mortgage broker or a mortgage lender.

If you are a mortgage broker, many states have a required minimum net worth of $25,000. New Jersey even requires a minimum net worth of $50,000. What is net worth? It is your company’s assets minus liabilities. For a new company, assets usually consist of cash (in your company's checking account), computer equipment and furniture. It does not include your car, unless title is in the company's name. Existing companies might also have accounts receivable and prepaid expenses. Liabilities are the amount of money a company owes. New companies usually do not have any liabilities.

Even if the state that you are interested in does not have a minimum net worth requirement, the licensing department might want to see a company's financial statement. They are looking to make sure that you can pay any claim that may arise after you are licensed. In order to get approval for a license, you must demonstrate to the banking department that you are serious about your financial responsibilities. Many states require an audited financial statement. This requires a very thorough review of your records by a CPA. Many accountants do not even prepare audited financial statements anymore. The accountants that do this type of work charge thousands of dollars to prepare the audited financials. If your state does not require a CPA-audited financial statement, it requires the president (or other officer) to swear that the financial statement is true and accurate.

The more assets you can show, the better. For existing companies, I counsel my clients not to distribute all of the profits to the shareholders of a corporation or members of a limited liability company. That lowers the net worth of a company. If the company shows that profits are retained to maintain operations or grow the business, the licensing department looks favorably at the company's application. Obviously if you are a start-up, you may have a limited amount of assets, but if you are adding new states, the licensing departments want to see how you have done in the past few years, when times have been more challenging.

The requirements for a mortgage lender license are even higher, typically $100,000 to $250,000. And most states do have a net worth requirement for lenders. If a mortgage lender needs a warehouse line of credit in order to fund its loans, the warehouse line creditor now requires a much higher net worth (I’m hearing numbers in excess of $1,000,000).

Regardless of whether a state requires a minimum net worth, at least at the very beginning of your company's existence, you should put in and keep as much money in the business as you can to show the licensing departments that you are serious about being a successful company that intends to be an upstanding member of the community.

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