Neuswanger: Mortgages and marijuana
The Mountain Mortgage Guy
With the legalization of recreational pot in Colorado, many home gardeners have turned their green thumbs toward cultivating a private stash of weed. Recreationally, each adult over 21 can cultivate up to six pot plants at once with as many as three flowering at any given time. This has resulted in some very impressive backyard gardens and indoor grow rooms. Those with a medical card are also allowed to grow their own as well, as can caregivers.
But as pot remains illegal under federal law, it can pose an issue if the grower is applying for a mortgage loan. There are federal laws that call for the forfeiture of property used in a crime, and growing your favorite flavor of weed is still a federal crime.
It’s unlikely the Drug Enforcement Agency is going to come to raid your back yard patch, but in theory, it is possible. Also simple possession is technically a crime punishable under federal law and could make your property subject to forfeiture if you seriously get on the wrong side of the feds.
Fannie Mae and Freddie Mac provide 99% of the mortgage money in the United States and as such tend to be a little cautious when they find out a borrower is using his property in a manner that violates federal law. And, if the property gets seized, the mortgage holder is usually out the money they loaned on the property. In recent months we have heard stories of loans being declined when the appraiser photographs evidence of marijuana cultivation or use on the premises.
The appraiser is required to take a photo of each room in the home, and the outside as well. While I do not think any local appraiser is going to judge a homeowner for growing pot or deliberately point it out, sometimes, if the plants are large and obvious, or the homeowner’s bong collection is proudly on display on the coffee table, it’s pretty hard to avoid. One thing the homeowner cannot do is dictate to the appraiser what areas of the home are photographed.
If the transaction is a purchase and the plants are growing outside, the lender would likely call for a reinspection to document the plants were removed. If it’s an indoor grow room, the lender might require that not only the plants be removed before closing but also any fixtures related to the grow be removed (such as fans or grow lights).
If the transaction is a refinance it is likely the lender will decline the loan because of the likelihood of the borrower re-establishing the grow even if it was removed. It would be necessary for the borrower to remove the plants/fixtures and wait awhile and re-apply with a different lender. If the property is a rental, and the tenant has been growing weed, it’s likely the owner would be turned down and have to re-apply after the crop is gone.
It’s not that Fannie Mae and Freddie Mac have any particular policy about pot, it’s just that they do not like the possibility of getting the property they hold as collateral seized and being out the money they loaned against it. If you are a ganja gardener and plan to refinance your home you need to plan to do it in between crops. If you are a real estate agent and have a home listed it might be best to not promote the grow room as an amenity (although many buyers might see it as such!) and ask the seller to wrap up the harvest before listing the house.
Chris Neuswanger is a mortgage loan originator at Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers. His web site is http://www.mtnmortgageguy.com