The nature of work is changing in this country. Where once employees tied themselves to an employer for years – even decades – now we tend to switch jobs more often and work for multiple employers.
This shift has given rise to the gig economy: A segment of workers who forgo traditional employment in favor of an a-la-carte approach to self-sustainability. This trend creates a significant advantage for mortgage originators who are willing to think outside the box.
But first, let’s talk about the gig economy.
The gig economy isn’t any one thing. It’s a flexible way to working that includes unlimited variations of employment.
More than one third (about 36%) of U.S. workers take part in the gig economy in some way. Some workers dabble a few hours a week for pocket money. Others invest themselves full time in gig and freelance work. Ridesharing apps and online marketplaces are always in the news, but the fastest growing segments of the gig/freelance economy are knowledge-intensive industries, according to a report by McKinsey.Gig workers and freelancers represent a tremendous opportunity for mortgage originators. Click To Tweet
For many people, the gig economy is a welcome source of income when they’re between jobs or facing a difficult expense. With the help of clever technology, they can log in to a platform or send an email to their clients (who may reside anywhere in the world) to find work.
According to Steve King, owner of Emergent Research and a top researcher on the gig economy, there are two types of gig workers.
“Independent” workers utilize other people’s or company’s platforms to generate income, like Uber, Lyft, AirBnB, Amazon, Etsy, TaskRabbit, CrowdFlower, or countless others. They perform as-needed tasks based on the platform’s system. They work their own hours and provide their own tools.
“Contingent” workers (traditional freelancers) develop long-standing relationships with their own clientele. Many perform premium, highly skilled services for a wide range of clients. This category can include anything from by-the-job house cleaning to million-dollar contract architects and engineers.
Why do people choose to work like this? Several reasons, but mostly because they want control and flexibility in their lives.
There’s no doubt that the gig economy is nontraditional. But it’s very real, and as our economy evolves and we move away from the single-employer/single-income lifestyle, we’ll need tools to process mortgage applications and put these workers in their own homes.
Gig workers and freelancers represent a growing portion of the workforce, but they usually don’t qualify to own a home.
Mortgage broker Don Calcaterra Jr. says he runs into more people with nontraditional income every year. “I deal with a lot of people who fall out of the guidelines,” he says. He notes the irony of the current mortgage environment. “It’s now easier to do a $5 million commercial loan than it is” to do a small mortgage for a person with nontraditional income, even if the buyer has good credit, a healthy debt-to-income profile, and plenty of cash for a down payment.
While Dodd-Frank strengthened the mortgage industry by creating tighter underwriting standards, it left gig economy workers on the outside. Lenders are wary about processing mortgages for borrowers who don’t have stable, confirmable employment.
This means lenders have to take a serious look at borrowers’ income. They evaluate tax returns, bank statements, and other income documentation. The vetting process is thorough (rightfully so), but it poses a significant challenge for freelancers and gig workers.
Why are these kinds of workers at a disadvantage?
Mortgage underwriters want to see a steady source of income. They want at least two years of stability from self-employed workers before they’ll approve a loan.
That isn’t two years of self-employment work. They want two years of stability. For many freelancers, it can take several years just to build a stable business. This means gig workers and freelancers have to work longer to prove themselves to a lender than traditional employees.
Additionally, gig workers and freelancers don’t receive a standard salary like a traditional employee, so their income floats up and down from month to month. This makes lenders uncomfortable, even if a freelancer’s worst month is enough to make the mortgage payment.
A freelancer or gig worker doesn’t have access to many of the protections employees enjoy. For instance, they can’t claim unemployment if they can’t find clients or lose access to an income platform. If they get kicked off Uber or lose the ability to list their property on AirBnB, the Labor Department can’t help them.
Furthermore, freelancers and gig workers have fewer termination protections. It’s much easier to stop working with a contractor than fire an employee. Contractors can’t sue for wrongful termination, and they have a much harder time proving discrimination or hostile work environment.
Gig workers and freelancers rely on deductions to reduce their yearly tax liability. They deduct the costs of tools, supplies, their vehicle, and – the big one – their home office. Naturally, this reduces their adjusted income. Since regulations require lenders to rely heavily on tax statements, gig workers and freelancers have a harder time qualifying for mortgages.
For many gig workers and freelancers, home ownership is a dream they never expect to achieve. They resign themselves to renting for the rest of their lives, even though they make decent money and can easily afford mortgage appointments.
However… There is some opportunity for savvy mortgage originators to help gig workers and freelancers take out their own mortgages, especially if you understand alternative-income documentation programs.
Many legacy underwriting systems just aren’t designed to serve gig economy workers and freelancers. They don’t know how to organize, compute, and process uneven income over time.
So one way lenders plan to solve this problem is with clever technology.
Freddie Mac has begun a partnership with financial technology company LoanBeam. Their goal is to simplify the underwriting of self-employed borrowers.
According to Freddie Mac, “LoanBeam’s solution lets [lenders] calculate self-employment income quickly and easily using sophisticated optical character recognition (OCR) technology — helping [lenders] serve this expanding market.”
OCR technology essentially scans and extracts key information from borrowers’ financial documents in order to calculate a qualifying income to process the loan. This means a broker or loan officer won’t have to engage in a tedious manual process of finding and sorting income data.
Freddie Mac intends to integrate this technology into their automated underwriting system in the near future to quickly evaluate a borrower’s income no matter where it comes from.
In the meantime, however, your gig worker and freelancer clients should expect a long, drawn out mortgage application process. You’ll be forced to request numerous documents from your clients and work closely with underwriting to qualify the mortgage.
New legislation is another way gig workers and freelancers may gain access to mortgages.
For years, federal lending rules have shown preference to applicants with easily documented income. Underwriters like to see neat W-s, a two year chain of pay stubs from the same company, and evidence that employment will continue. If they can’t fit a borrower’s income pattern into the boxes mandated by qualified mortgage regulations, they often have to turn down the loan.
But the future is a bit brighter for freelancers and gig workers. Congress, recognizing that the economy is changing, has begun a bipartisan push to make the home mortgage process easier for gig economy workers.
The Self-Employed Mortgage Access Act is a bill that, if passed, would allow lenders to look for less traditional sources of income, beyond the narrow range of the current qualified mortgage regulations. According to one co-sponsoring Senator, 42 million Americans are self-employed or working in the gig economy in some fashion, so this legislation has the chance to create a tremendous impact in the mortgage industry.
How long before this legislation takes effect? It’s hard to say. Congress sometimes works at an agonizingly slow pace. But since this bill has bipartisan support, and it affects a massive portion of the American population, roadblocks should be minimal.
Now is the time to turn your attention to non-qualified mortgage (non-QM) originations. They represent a tremendous growth opportunity. Non-QM loans don’t just go to people with bad credit. They also apply to people who struggle to check all the regulatory boxes.
Freelancers and gig workers are exactly the type of clients you need. There’s plenty of them willing to buy because they’ve been previously shunned by the mortgage industry. And as millennials (who make up the bulk of the gig economy) stabilize their careers and look to buy homes, you’ll have a nearly endless stream of clients.
Admittedly, non-QM financing isn’t easy. Non-QM borrowers need high credit scores and low debt. You’ll have to work with your lender(s) to find ways to verify your clients’ income. But as our economy and mortgage industry changes, tapping the gig economy by focusing on non-QM loans will help you stand out as a mortgage originator.