Buying home just got easier for many in gig economy
If you're one of the millions of Americans who are self-employed or earn money on the side through freelance, contract or “gig” work, you may know the drill firsthand: Applying for a mortgage can be an intrusive ordeal. Compared with people who have W-2 forms or pay stubs to verify their income, you encounter a much more time-consuming process. Lenders want to see your full tax returns for a couple of years, not just an electronic transcript from the Internal Revenue Service. They need hard documentation of any income you're claiming to qualify for the loan. And even if you can document your sideline pay, it might not be steady enough or ongoing long enough to be eligible under mortgage-industry rules. You're likely to get hit with a lot of questions: How come you reported less on your tax returns than what you're claiming as your income on your loan application? You also may get charged more in fees, take longer to get approved, and end up with a slightly higher interest rate on your loan. But major improvements are underway: As of last week, the two largest sources of mortgage money in the U.S., investors Freddie Mac and Fannie Mae, have deployed remarkable new technology that automates underwriting for applicants who are self-employed or have significant side income. Applications that previously would have taken days to analyze and verify may now take just minutes, thanks to the use of “optical character recognition” (OCR) technology that reads tax returns, identifies what qualifies as eligible income, and integrates it into both companies' electronic underwriting systems. Dallas-based tech company LoanBeam supplies the OCR solution in both cases. Freddie Mac notified its thousands of lenders of the change March 6; Fannie Mae introduced its program in December. Instead of an underwriter having to plow through wads of tax documents, lenders now can upload the paperwork directly to LoanBeam, where it will be scanned and analyzed within minutes, saving time and money for
borrowers and lenders alike. If Freddie's automated underwriting system approves the application with the LoanBeam-verified income, Freddie will not hold the lender responsible for inaccuracies that pop up later. Fannie Mae's system does the same. The move to automation could have wide impacts. In 2016, the Bureau of Labor Statistics reported that there were about 15 million self-employed individuals in 2015, one of every 10 people in the workforce. A taxpreparation industry estimate indicated that more than one-third of workers earned income from “gig-economy” sources in 2015, such as driving for Lyft or renting out a house via Airbnb, and that the total will exceed 40 percent by 2020. Lenders say Freddie's and Fannie's improvements could have benefits for homebuyers, sellers and realty agents that may not be immediately obvious. Josh Moffitt, president of Silverton Mortgage, headquartered in Atlanta, said that having absolute certainty about income eligibility up front should give buyers greater confidence as they shop for a home. And it could help dramatically in meeting contingency-clause financing deadlines in contracts. John Meussner, executive loan officer for Mason-McDuffie Mortgage in San Ramon, California, said streamlined underwriting also should eliminate a lot of confusion and conflict between applicants and lenders. Bottom line: If you're self-employed or have gig income, be aware of the changes. Since the programs are new, not all lenders may offer streamlined income verification yet, but if they're on the ball, they soon will.