The gig economy — with its free-lancers, contractors and self-employed workers — is upon us. It’s a career choice embraced by a growing number of people. While these workers are making up a larger slice of the modern work-place, they often don’t qualify to own a home.
It’s not because they can’t afford one or won’t be able to make loan payments. It’s because tightening lending standards are often leaving them on the outside looking in. This is an opportunity for mortgage originators.
Steven is your typical young professional trying to make a living in today’s world. In his mind, he has figured out a great plan for life. During the day, he works as a freelance copywriter, picking up assignments through various contacts he has met over the years.
At night, he uses his car to make extra money by driving for a rideshare company. And as a frequent traveler, Steven often lists his apartment on a home-share website to earn additional income when he is out of town. This is a dream for Steven. The work-schedule flexibility and general lifestyle are everything he could want.
But Steven and his wife face a major problem. The home of their dreams is out of reach. He cannot obtain a mortgage, despite having more than enough money for a down payment for a starter home as well as the cash-flow to make the required payments on the loan. Steven is a textbook representative of the so-called gig economy — an independent contractor who takes on a variety of short-term jobs as opposed to being locked into a traditional 9-to-5 work schedule.
The gig economy is real. About 16 percent of Americans work in the gig economy, according to a study released by Fannie Mae’s Economic and Strategic Research Group. They drive for Uber. They lease their homes via Airbnb. They perform any number of services. But gig-economy workers are not people who bounce between jobs trying to make ends meet.
The same Fannie Mae report says 44 percent of gig-economy workers are between the ages of 18 and 34. About half make $50,000 a year or more, and two-thirds have obtained at least some college education.
The study also shows that a majority of gig-economy workers think their financial situations are improving. Another survey also says that over three-quarters of gig-economy workers believe that the best days of freelancing are ahead of them.
And the number of gig-economy workers is growing at an astronomical rate. Some 42 million people will be self-employed by the year 2020 — nearly triple the 15 million workers who work in the gig economy today, according to an estimate from FreshBooks, an accounting and invoicing company. Other estimates state that, already, one-third of millennials work independently.
Gig-economy workers earn good incomes. They are in the prime age group to start marrying and having children. They have an optimistic attitude about the economy — and their future — that many other Americans do not share. And they are growing at a rate that is frankly mind-boggling.
The Stevens of the world are no longer an anomaly. Gig-economy workers are a demographic in perfect position to seek a home mortgage, but they face a huge uphill struggle in that effort, if it is possible at all.
Increased underwriting standards have absolutely strengthened the mortgage industry. Mortgage originators must now document their borrower’s ability to repay a loan to comply with Dodd-Frank Act consumer-protection regulations.
The tightened standards mean many banks and lenders take a hard look at tax returns and other income documentation before deciding whether to approve a mortgage. But this vetting places self-employed gig-economy workers at a disadvantage.
Mortgage underwriters are looking for a steady and stable source of income — typically two years of documented income and reasonable proof that those earnings will continue. The problem is that earnings generated by many short-term, freelance jobs — which is the norm for gig-economy workers — often does not qualify as the type of income that is required for the mortgage-qualification process. This situation can be made worse when that income is further offset by tax deductions taken for qualifying freelance expenses — such as a home office or transportation mileage.
So, for Steven and the millions of other Americans who make their money from free-lancing, buying a home has become a dream just beyond their reach, even if they are making a decent living. This presents an opportunity for keen mortgage originators, especially those familiar with alternative-income documentation programs.
Using bank statements to verify income, for example, shows what a gig-economy worker truly makes. Keep in mind, however, that gig-economy workers have to be self-employed for at least two years before bank statements can be used.
Many in the industry see non-qualified mortgage (non-QM) originations as not just a growth opportunity, but the growth opportunity. The rising-rate environment has dried up refinancing opportunities. With an underserved but deserving client base, non-QM could very well surpass $100 billion per year in issuances in the coming years.
It isn’t just time to start pursuing non-QM loans. Now is the time to find what unique segments are within this sector of the mortgage industry. Non-QM loans don’t just go to people with a checkered credit history or other issues. People who fall through the regulatory cracks also can obtain non-QM financing.
As stated earlier, individuals with freelance jobs, or gigs — and fluctuating incomes — frequently find it difficult to obtain a mortgage. But these gig-economy workers are exactly the type of clients that mortgage originators search long and hard for and who are ideal for the non-QM lending space.
The rise of the gig economy also allows a chance for mortgage originators to enhance their value in the workplace. Younger originators can relate better to younger clients. They understand the thought processes and motivations of millennials better than many experienced veterans of the industry. Adding younger originators to the roster is a great way to enhance and deepen a company’s reach into the market.
Millennials and others love the attraction of working on their own terms without having to go into an office or report to a boss. It is becoming easier by the day for this type of lifestyle to become a reality. The numbers of the self-employed and gig-economy workers are only going to grow.
Many assume that people who live the gig-economy lifestyle sacrifice financial stability for personal freedom. This is not true at all. They make great incomes. The advanced education many in the gig-economy have bodes well for future earnings growth, too. They are in the prime age to start a family and buy a house.
Gig-economy workers thrive off of deducting any and all expenses in order to reduce the bill come tax time. Tightened lending standards, however, require banks to rely heavily on tax statements before issuing a mortgage. It’s a Catch-22 that unfortunately shuts out many gig-economy workers from the ability to buy a house.
These difficulties present wonderful opportunities for mortgage originators. Non-QM financing has become the best opportunity for growth in the mortgage world. People in the gig economy represent what non-QM is now about. It can offer a path to homeownership for high-quality applicants who are otherwise caught in a loophole that prevents them from easily getting a home loan.