August 31, 2018

Lending in the gig economy

Plans are underway at Fannie Mae and Freddie Mac to make home loan qualification easier for people earning money in the modern “gig” economy.

For those not familiar, the “gig” economy refers to the pursuit of flexible, freelance employment instead of full-time work on a traditional career path.

In today’s ever-changing economy, it’s not easy to find stable, salaried positions that cover the bills. So some simply choose to work as independent contractors instead, opting for one-off gigs with companies like Uber, Lyft, TaskRabbit and Rover to better fund their lifestyle.

Workers in the gig economy often make similar income to salaried positions. One could even argue that their income is more dependable than that of salaried employees, whose job is closely tied to the success of their employer and the stability of their field.

So why is it so difficult for them to qualify for loans?

Well, in many cases, gig earnings don’t qualify as income under existing mortgage-industry guidelines. (Typical mortgages tend to require W-2 forms and IRS information going back at least two years.) Yet Intuit, the makers of TurboTax, estimates 34 percent of the workforce earned money in such pursuits in 2017, and as many as 45 percent will make use of the gig economy by 2020. And Fannie Mae recently surveyed 3,000 lending executives and found that two of every three lenders said better reception of gig income would either “significantly” or “somewhat” improve “access to credit” for many buyers.

Though the plans aren’t specific yet, Freddie has begun a partnership with software company LoanBeam, which provides automatic verifications of multiple income streams for self-employed people. A major step forward in accommodating an economy that’s here to stay.

Whatever the solution may be, it must still produce high-quality loans with low risks of default. Oh, and ideally, it will be automatable—after all, that’s how gig workers prefer to do business in this modern age.