Mortgage Basics for Startup Companies

Owning your own business or buying a home is the dream of many people, but getting a loan to buy real estate, an office building, or a house can be difficult. What’s more, it’s not uncommon for lenders to avoid small business owners or renters looking for housing.  That’s where a mortgage brokerage company comes in. They act as an intermediary between the borrower and the lender and can usually conduct business with the lender when the borrower can’t.

Starting Your Own Mortgage Business

Starting a business is more than just registering in your state. We have compiled this simple guide to understanding what goes into starting a mortgage business, specifically mortgage brokerages.  This will ensure that your new business plan is well-planned, registered correctly, and in compliance with the law. As you read through, you will learn important information that helps you determine whether starting a mortgage brokerage company is right for you.

Planning

Having a clear plan is essential to the success of entrepreneurs. Planning will help you determine the necessary aspects of your business and uncover any unknowns. As such, there are some important issues to consider, such as:

• What should you charge customers for your services?
• What are you going to name your company?
• What are the upfront and running costs? 
• What is your target market?

Let’s break down each question into individual sections for a clearer understanding. What should you charge customers for your services? Borrowers or lenders usually pay a fee of anywhere from 1% to 2%. This is a percentage of the total loan amount. Moreover, some brokerage firms charge application fees or other service charges, as well. What you end up charging is entirely up to you, but you mustn’t overcharge or undercharge yourself out of business. What are you going to name your company? Choosing the right name is challenging but important. If you don’t have a name yet, there are some crucial elements that you want to consider. For starters, it’s a good idea to have a name that is easy for your clients to remember. Although not a necessity, you have a much better chance of being remembered by the general public when your name is easy to pronounce and to the point. Long, overly complicated names tend to be a turn-off, so it’s best to stick with simplicity. You will also need to research to ensure that the name you have in mind isn’t in use. There may even be mortgage brokerage businesses with similar names to the one you want to use. Make a list of several potential names , and don’t get too attached to any one of them. You may have to go with your second, third, or even fourth name, depending on what’s available. What are the upfront and running costs?  One of the most appealing aspects of starting a mortgage brokerage business is that its upfront costs are rather low. In addition to permits and basic legal requirements, most brokerages can start at home with minimal or even no money. Likewise, the costs of running a small mortgage brokerage business are extremely low. For the most part, all that you have to do is pay for labor and office space.  Due to higher labor, office costs, and insurance, larger companies will bear higher running costs. What is your target market? When running a mortgage brokerage company, your target market includes other businesses looking to invest in real estate , people looking for homeownership, and investors looking for real estate or leases.

Earning a Living

As a mortgage company, you can typically look forward to high profits. Moreover, the profit margin of small companies is often higher than that of large companies because small companies have lower operating and management costs.  As a result, the margin can be between 10% and 50%, possibly more. It all depends on the size of your mortgage company.

Increasing Your Profits

One of the best things you can do for your mortgage company is to add additional services. This is because most people borrowing money need help to improve their credit.  If the borrower is not eligible for a loan, your company may provide loan assistance through credit rebuilding or cooperate with other companies that specialize in the field.  What’s more, it proves fruitful to work with insurance brokers, real estate agents, or real estate brokers to provide your customers with a comprehensive experience.  Many mortgage companies enjoy a substantial increase in profits, thanks to the revenue these additional services rake in. However, you want to do some research before you start offering such services. Adding additional services to your mortgage brokerage business might be prohibited in your state due to certain regulations. If you focus solely on the residential market, you could be missing out big time. This area of real estate is certainly popular, but so is business real estate. 

Choosing a Legal Entity

The most common types of legal entities are partnerships, sole proprietorships, LLCs (Limited Liability Companies), and corporations.  If you are worried about your mortgage brokerage company being subject to litigation, establishing a limited liability company or a legal entity such as a corporation can protect you from personal liability. This means that your assets aren’t in jeopardy if your business is sued or under financial hardship. 

Registering Your Taxes

As with most things in life, you will need to pay taxes. As such, you need to register for both state and federal taxes before opening your doors for business.  But to register a business for taxes, you first need to have an EIN (Employer Identification Number) . Fortunately, this number is easy to obtain and doesn’t cost you anything but your time. Depending on the company structure you choose, you may have different options for taxing your business. For example, some limited liability companies can benefit from taxation as an S corporation more so than they would operate as an LLC. For more information on the various types of companies and the differences between them, be sure to check out our guide here . Please keep in mind that certain state taxes may apply to your company, so you will need to research your state’s taxes and how they may affect you.

Establishing Your Business’s Bank Accounts

Your mortgage company needs to have dedicated bank accounts. By opening these accounts, you can effectively protect your assets. Problems arise when business owners combine their personal and company accounts. If your company is sued and you have combined your business and personal assets, anything you own becomes at risk of being seized. This includes your home, vehicle, and other valuables. Besides, establishing a business banking account can help you find the best credit cards and other types of financing, improved interest rates, higher credit lines, and more on behalf of your business.

Establishing Your Business’s Accounting

Keeping track of your various expenditures and sources of income is essential to understanding your company’s financial performance. Maintaining accurate and detailed records also goes a long in simplifying your annual taxes.

Getting Your Licenses and Permits

Not getting the appropriate licenses and permits can result in huge fines or even shut down your business.  The SAFE Act (Secure and Fair Enforcement of Mortgage Licensing Act) of 2008 states that all mortgage brokers must meet certain minimum licensing standards. Included in these requirements are 20 hours of learning from the National Mortgage Licensure System and passing the SAFE Mortgage Loan Originator Test.  State and local business licensing requirements vary by state. You can find your state’s specific licensing requirements by visiting the Small Business Administration (SBA) online and navigating their website .

Obtaining Insurance

It is against the law to operate a business of any kind without the proper insurance. Plus, having business insurance keeps your company safe from financial loss. As you explore your options for insurance, you are bound to come across multiple policies. If you are just starting out and your budget is tight, consider getting general liability. Many small businesses use general liability, as it’s the most common form of coverage in the United States.

In Closing

There is a lot that goes into starting your own mortgage company. Fortunately, the costs are low, and you don’t need a lot of capital to sustain operations. However, you want to be sure that you follow the proper guidelines for starting your own small business. This includes securing insurance, opening a business bank account, obtaining licenses and permits, and so on. In doing so, you can ensure a smooth transition into the world of a mortgage brokerage. Sources: Apply for an Employer Identification Number (EIN) Online | IRS.gov Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act examination procedures | Consumerfinance.gov Apply for licenses and permits | Small Business Administration