Mortgage Market Opens for Gig Workers

Lew Sichelman

The pandemic inspired millions of workers to make a break for it and leave their offices and jobs behind – many to start their own businesses or try part-time work. 

But COVID-19 also led the two largest suppliers of money for home loans to tighten their underwriting standards, making it more difficult for so-called “gig workers” to qualify for financing. 

Now, Fannie Mae and Freddie Mac – the government-sponsored enterprises that purchase loans from primary lenders and bundle them into securities for sale to investors – have lifted some of their more onerous requirements. As a result, funding should be more plentiful. 

16M 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 clients. Musicians are gig workers, as are Lyft drivers, some tax preparers – even syndicated housing columnists. 

Prior to the pandemic, the Bureau of Labor Statistics estimated there would be 10.3 million of these workers by 2026. But since COVID struck, it’s likely that figure will have risen much higher. 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 reporting revenue, expenses and net income from self-employed borrowers if they wanted to sell their loans to Fannie and Freddie, as most do. Borrowers also had to present their most recent bank statements. 

That didn’t work for those gig workers who were paid cash, did not use banks or had no accountant to prepare the required documents. But now, those rules are gone and some lenders, perhaps sensing a grand opportunity to boost market share, are targeting gig workers directly. 

Perhaps the most prominent lender in the country, Detroit-based Rocket Mortgage, is one of those. It advises self-employed borrowers to keep a careful eye on their all-important debt-to-income ratios. It also wants them to keep their credit in check and keep business expenses separate from personal expenses. 

Another top lender, United Wholesale Mortgage, is offering bank statement loans for the self-employed. The Pontiac, Michigan-based wholesale lender does not originate loans directly; rather, it funds loans written by local mortgage brokers. 

UWM recently told its lender-clients that it will allow “qualified borrowers” to provide their personal or business bank statements, as opposed to their tax returns, to qualify for a loan up to $3 million. The company’s bank statement loans also allow down payments as low as 10 percent, and there is no need for mortgage insurance, a significant add-on many lenders charge when the down payment is less than 20 percent. 

Smaller lenders that offer specialty mortgages are also reaching out to the self-employed. A typical one, Sprout Mortgage of Port Saint Lucie, Florida, makes a direct appeal, touting loans based on bank statements rather than W-2s or tax returns. 

“We understand you love your freedom, you appreciate flexibility and you’re ready to purchase a home, but you don’t have all the documentation a typical mortgage requires,” the company said on its website. 

 Tech Shows Niche Growing 

Meanwhile, in an indication this lending niche is growing, technology is catching up. For example, Freddie Mac has launched a new feature that analyzes direct deposit data to help underwriters make better decisions. According to Freddie, 97 percent of all workers, both full- and part-time, now use direct deposits. 

At the same time, LoanLogics, a Jacksonville, Florida, technology firm, is supporting Freddie’s initiative by providing “rep and warranty” relief related to the accuracy and integrity of the tax return data used to calculate borrower qualifying income. The insurance-like program protects lenders from being forced to buy back loans if they miscalculate or otherwise err when approving a borrower. 

One of the big problems with gig workers is accounting for their sometimes-spotty, sometimes-seasonal and otherwise irregular incomes and debts. But LoanLogic’s product will assist underwriters in calculating self-employment and nontraditional income from any source, the company said. 

Fannie Mae is also expanding its verification process, albeit manually. When the required data is not instantly available digitally, underwriters now will be able to keep the process moving 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 generally have full-time employment, are college educated, use the gig economy to supplement their income and make about $50,000 or more per year in total,” a Fannie report said. 

Still, there is a downside to lending to those who work in the gig economy. Jobs can end quickly and unexpectedly. Freelancers, for example, are usually let go before staffers. There’s some uncertainty about how and when gig workers will be paid, and important benefits like health insurance and bonuses are all but nonexistent. 

All in all, though, more gig workers will be able to enjoy the perks of self-employment without worrying that its quirks will prevent them from becoming homeowners.  

— Freelance writer Mark Fogarty contributed to this column.

Lew Sichelman has been covering real estate for more than 50 years. He is a regular contributor to numerous shelter magazines and housing and housing-finance industry publications. Readers can contact him at lsichelman@aol.com.