Getting a mortgage is one of the challenges for independent workers in the #GigEconomy. Lenders typically qualify loan applicants based on employment income as reported on a W2. There could be significant other income reported on 1099s, but that seldom seemed sufficient for the underwriters.
This has been a problem for decades and frankly is one of my pet peeves. Back in the day, at my firm, M Squared Consulting (as I like to say, a #GigEconomy company before the term was even coined), we were frequently asked to verify income for the consultants who found project work through us. We often needed to offer the disclaimer, that the work of our consultant, the loan seeker, had been done as an independent contractor. In the cases of some of our more successful consultants, we could provide successive years of significant 1099 income well north of 6 figures, but for many loan officers that was not sufficient. What is the magic of a W2, when an employee can be terminated at any time? Year over year consulting income, even if it is done independently, demonstrates a verifiable ability to earn income year over year. Isn’t that what the bank wants?
It appears, the financial industry is catching on. The Washington Post announced recently that the two largest mortgage originators in the country, Fannie Mae and Freddie Mac, are working on a mortgage instrument for gig workers. After surveying a number of lenders, Fannie Mae found that more and more banks are increasingly seeing applications with gig income from various sources, however current guidelines would not improve access to credit for many of these potential borrowers. The efforts underway now seek to change that in a way that still ensures high quality loans, delivered efficiently, which means in a highly automated fashion. Freddie Mac has confirmed that they have teamed up with a software platform, Loan Beam, which enables the income verification of multiple income streams for independent workers.
Fannie and Freddie are not the only ones out there looking at this growing non-employee segment of the workforce. One lender, Angel Mortgage, already has a product for independent workers. A self-described “alternative mortgage lender”, Angel has a product called a “Bank Statement” mortgage program, where the bank statement and its balances are used to define the credit worthiness of the applicant, rather than a W2.
My hope is that as these various lenders develop loan products they also take into account another aspect of independent worker income, which is the variability of the income stream. Independent workers can have amazing months and then lean ones. They may work fewer hours in a given year and then take off on a trip, after all flexibility is part of why they work independently. As such, the ideal mortgage instrument would be one that accommodates this variability; the instrument should enable increased principal payment in high income periods and lower payments in leaner ones without incurring penalties.
Lenders may think this is naïve on my part, but the truth of the matter is, independent workers tend to be far more attentive to their personal finances than traditional employees. A recent T. Rowe Price study noted that 78% of gig workers consider themselves far more involved with their personal finances. 39% check their bank accounts regularly. 60% manage their own investments, compared to 50% of employees. One explanation offered for this difference is that independent work by definition, requires more attention, since these workers need to file quarterly taxes. “They can’t take their income or their financial futures for granted.”, said Stuart Ritter, a Senior Financial Planner at T. Rowe Price. So will they pay attention to their mortgages? Absolutely.
And speaking of paying attention, there have been a variety of studies of late done by financial institutions interested in learning more about #GigEconomy participants. Besides T Rowe Price, Prudential recently released a white paper on Gig Workers and retirement products. Hyperwallet and Bank of America have also done studies on the financial habits of independent workers. With so much warranted attention from financial services providers on this growing segment of workers, is there any question that there will be new products coming out to serve this workforce cohort? Not to me…