Qualifying For A Loan With Gig Economy Income

Dated: 06/04/2018

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The two biggest sources of home, mortgage money in the country, investors Fannie Mae and Freddie Mac, are quietly working on ways to make qualifying for a home purchase easier for participants in the booming “gig” economy.  The gig economy refers to hundreds of income-earning activities that allow workers to set their own hours, work for as long or as little as they choose, and function as independent contractors or freelancers as opposed to salaried employees. Prominent examples include people who work as drivers for Uber or Lyft, assemble Ikea furniture through TaskRabbit and offer rooms in their homes on Airbnb. 

Estimates vary, but anywhere from just under 20 percent to 30 percent or more of the U.S. workforce participates in some way in the gig economy. Last year, Intuit, which owns Turbo Tax, estimated that 34 percent of the work force earned money in gig pursuits and projected that this could rise to 43 percent by 2020. But when buying a home, the challenge for these workers is to make their gig-sourced earnings count as income for mortgage-qualification purposes. Lenders typically look for stable and continuing income streams: two years of documented income plus reasonable prospects that those earnings will continue for another several years. Lenders also routinely obtain tax-return transcripts from the Internal Revenue Service to confirm an applicant’s self-reported income. 

Gig income often doesn’t fit neatly into these boxes. It can be sporadic and variable, depending on how much time an individual is able to devote to the work. Gig earnings can be substantial — thousands of dollars a month — but if that money can’t qualify as“income” under existing mortgage-industry guidelines, it may not help in buying a home with a standard mortgage.“We’re seeing gig income becoming more and more prevalent, especially among the younger demographic — first-time buyers who have embraced things like Uber and Airbnb as a means to make money,” said John Meussner, executive loan officer.  Yet those earnings may not qualify for conventional mortgages. 

Enter Fannie Mae and Freddie Mac. Fannie recently surveyed 3,000 lending executives and found that gig income on applications is increasingly common, but 95 percent said it’s difficult under current guidelines to use these earnings to approve borrowers’ applications. Two of every 3 lenders said better treatment of this income would either“significantly” or “somewhat” improve “access to credit” for many buyers.Fannie and Freddie are actively pursuing projects that would do just that. The tricky part for both companies: Whatever solutions they develop must still produce high-quality loans with low risks of default at the end of the process,and ideally must be automatable — that is, borrower information could be entered into Fannie’s and Freddie’s electronic underwriting systems at the application stage. 

Freddie’s efforts come under its“borrower of the future” initiative. Terri Merlino, vice president and chief credit officer for single-family business, said the company is studying automated solutions “outside the box” to validate income from different sources for self-employed and gig-economy earners. Neither Freddie nor Fannie was able to discuss details on what they’re considering, but Freddie confirmed its partnership with high-tech software company LoanBeam, which provides automated verifications of multiple income streams of self-employed and other borrowers.

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Noa Porter

Noa has been exceeding the expectations of his clients since launching his real estate career in 2003. His client list includes CEO's of Fortune 500 companies, biotechnology executives, professional ....

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