Mortgage market opens to gig workers
The pandemic has prompted millions of workers to take a break and leave their desks and jobs – many to start their own businesses or try to work part-time.
But COVID-19 has also led the two biggest providers of money for home loans to tighten their underwriting standards, making it harder for so-called “gig workers” to qualify for financing.
Now Fannie Mae and Freddie Mac — the government-sponsored companies that buy loans from major lenders and bundle them into securities to sell to investors — have waived some of their most onerous requirements. As a result, funding should be more abundant.
16 million workers and counting
Gig workers are defined as independent contractors, on-call workers and temporary workers. Typically, they enter into formal agreements with on-demand companies to provide services to the company’s customers. Musicians are gig workers, as are Lyft drivers, some tax preparers — even unionized housing columnists.
Prior to the pandemic, the Bureau of Labor Statistics estimated that there would be 10.3 million such workers by 2026. But since COVID hit, it’s likely that number will have grown much more. Pew Research recently put the number at 16 million.
During the pandemic, lenders were required to obtain a year-to-date profit and loss statement showing the income, expenses and net income of self-employed borrowers if they wanted to sell their loans to Fannie and Freddie, like most do. Borrowers were also required to present their latest bank statements.
This did not work for site workers who were paid in cash, did not use banks or did not have an accountant to prepare the required documents. But now those rules are gone and some lenders, perhaps sensing a big opportunity to increase their market share, are targeting gig workers directly.
The country’s largest lender, Detroit-based Rocket Mortgage, may be one of them. He advises independent borrowers to keep a close eye on their very large debt ratios. He also wants them to control their credit and separate business expenses from personal expenses.
Another top lender, United Wholesale Mortgage, offers bank statement loans to the self-employed. The Pontiac, Michigan-based wholesale lender does not make loans directly; instead, it finances loans taken out by local mortgage brokers.
UWM recently told its lending customers that it would allow “qualified borrowers” to provide their personal or business bank statements, as opposed to their tax returns, to qualify for a loan of up to $3 million. The company’s bank statement loans also allow down payments as low as 10%, and there’s no need for mortgage insurance, an important add-on that many lenders charge when the down payment is less than 20%.
Smaller lenders who offer specialty mortgages also cater to the self-employed. A typical guy, Sprout Mortgage of Port Saint Lucie, Fla., makes a direct appeal, touting loans based on bank statements rather than W-2s or tax returns.
“We understand that you love your freedom, appreciate the flexibility and are ready to buy a home, but you don’t have all the documentation required for a typical mortgage,” the company said on its website.
Growing Niche Tech Shows
Meanwhile, in an indication that this lending niche is growing, technology is catching up. For example, Freddie Mac launched a new feature that analyzes direct deposit data to help underwriters make better decisions. According to Freddie, 97% of all workers, full-time and part-time, now use direct deposits.
Meanwhile, LoanLogics, a technology company in Jacksonville, Fla., is supporting Freddie’s initiative by offering “representation and warranty” relief related to the accuracy and integrity of tax return data used to calculate the eligible income of the borrower. The insurance-like program protects lenders from having to repurchase loans if they miscalculate or otherwise err when approving a borrower.
One of the big problems with gig workers is accommodating their sometimes uneven, sometimes seasonal, and otherwise irregular income and debt. But LoanLogic’s product will help underwriters calculate self-employment and non-traditional income from any source, the company said.
Fannie Mae is also extending its verification process, albeit manually. Where the required data is not instantly available in digital form, underwriters will now be able to advance the process by turning to credit reporting agency Equifax for verification requirements.
Of course, not all gig workers drive part-time for DoorDash or sleep in their parents’ basements.
“Gig economy workers typically have full-time jobs, are college-educated, use the gig economy to supplement their income, and earn about $50,000 or more per year in total,” says a report. by Fannie.
Still, there is a downside to lending to those working in the gig economy. Jobs can end quickly and unexpectedly. Freelancers, for example, are usually fired before employees. There is some uncertainty about how and when gig workers will be paid, and important benefits like health insurance and bonuses are virtually non-existent.
Overall, though, more gig workers will be able to enjoy the benefits of self-employment without worrying that its quirks will keep them from becoming homeowners.
— Freelance writer Mark Fogarty contributed to this column.
Lew Sichelman has been covering real estate for over 50 years. He is a regular contributor to numerous shelter magazines and housing industry and housing finance publications. Readers can contact him at [email protected]