I just read an interesting article on the Freddie Mac site from MBO Partners, it was called “The State of Independence In America”. The findings of this article show that Americans who are independent contractors have grown 4.4% in 2018 total a total of 42 Million adult workers. With that much of the work force involved in this new economy I think we need to sharpen our skills on supporting this new type of borrower.
Some would think that this group of independents means just fully self employed workers or in other words an all-or-nothing business owner, but the article outlines that there are three major groups of independents.
- Full Time (Over 15 hours per week)
- Part- Time (Under 15 hours per week)
- Occasional (irregularly or sporadically)
The information provided shows that in today’s economy we are a “side gig nation”. I think this has been grown by great platforms that help us have our side gig and still maintain our main source of income. A few examples I can think of off hand are Uber, Etsy, Ebay, Multi Level Marketing , Fiverr, and Upwork.
So what if our borrower has a side gig, gets K-1 income but is under 25% owner?
Good news is Fannie Mae guidelines do a great job explaining their acceptance of that form income found in the Other Income section of the guidelines ( B3-3.1 “Employment and Other Sources of Income)
For borrowers who have less than 25% ownership of a partnership, S corporation, or limited liability company (LLC), ordinary income, net rental real estate income, and other net rental income reported on IRS Form 1065 or IRS Form 1120S, Schedule K-1 may be used in qualifying the borrower provided the lender can confirm the business has adequate liquidity to support the withdrawal of earnings
Pro Tip: make sure you are following the same rules to confirm the distribution of that K-1 income (lines 1,2, and 3) as you would for a borrower with over 25% income.
For Freddie Mac they don’t offer the same direct guidance stating K-1 income sources under 25% is acceptable. However they do provide this guidance which leads me to say that it is acceptable income as long as it meets the same standards that Fannie Mae offers.
FHLMC Allregs 5301.1 section B
Regardless of the underwriting path, the income qualification sources used to qualify the Borrower (whether or not specifically addressed in Topic 5300) and the documentation in the Mortgage file must be evaluated for stable monthly income qualification requirements and must meet the requirements of Topic 5300. Income qualification sources that do not meet these requirements or are not calculated correctly may invalidate the Loan Product Advisor Risk Class on the Feedback Certificate.The Seller must include a written analysis of the income qualification sources and amount in the Mortgage file. In addition, all documentation used to establish a stable monthly income must be retained in the Mortgage file.
As our economy evolves, we need to keep evolving to understanding how our clients earn income. Even if it means multiple sources. As long as we stick to the four requirements of all income (Stable , 3 years reasonable continuance , a history of receipt, and proper documentation) I don’t see any reason to shy away from using this income to qualify borrowers!
Welcome to the “side gig” economy!