The snag of part-time income
Posted on
Sep 27, 2013 Kenneth R. Harney
WASHINGTON — It’s an issue that hasn’t gotten much attention, but should be a red alert for first-time buyers and others who supplement their incomes with part-time work: Though part-time earnings are playing an increasingly important role in the post-recession American economy, the income you earn part time may not count when you go to buy a house.
What? Isn’t income always income? If you make $42,000 from your regular full-time job and another $18,000 by working part time at a second job, isn’t your gross income $60,000?
The IRS would tell you it is. But mortgage lenders may disregard the $18,000 unless you can document that you’ve been receiving the extra money steadily for two years and the pay is likely to continue.
There might be some wiggle room on this depending on your specific circumstances, but under rules established by the dominant players in the home loan market — Fannie Mae, Freddie Mac and the Federal Housing Administration — part-time income generally isn’t "qualifying income" for mortgage purposes until it’s been flowing for a couple of years.
The problem can be especially severe for borrowers with moderate incomes who have solid credit histories and have taken on second jobs to support their families. Robert Montalbo, a loan officer in San Antonio with Premier Nationwide Lending, a mortgage banking firm, says he sees many credit-worthy applicants who "get a [part-time] second job to make ends meet" and who simply want a piece of the American dream — to buy a home of their own.
"Even if they can show they’ve worked at that [part-time] job for 16 months straight I may have to turn them down," Montalbo said in an interview.
But modest-income applicants are hardly alone in confronting the problem. Richard M. Bettencourt Jr., a branch manager with the Mortgage Network Inc., in Danvers, Mass., recounts a recent experience he had with a borrower who earns $96,000 a year. The applicant had been self-employed as a certified public accountant for 12 years but had to close his business because of a heart condition. However, two of the CPA’s previous clients convinced him to accept part-time positions for their firms. He received regular salaries from both companies but had worked for only one of them for more than two years. As a result, only the salary from that company qualified as "income" for mortgage application purposes; the earnings from the other were deemed ineligible by underwriters.
"Because of the guidelines" — in this case Fannie Mae’s rules — "I had to deny him a mortgage because the ‘second’ job was not on the books for two years," said Bettencourt. "How’s that for a scenario?"
Part-time income snags like this could prove to be an increasingly important constraint to the housing market recovery, especially since relatively few prospective buyers who depend on part-time work become aware of the problem until they apply for a loan.
According to data released earlier this month by the Bureau of Labor Statistics, 7.9 million Americans were employed part time "for economic reasons" in August — 4.8 million worked part time because of "slack work or business conditions," 2.7 million "could only find part-time work" — and 19.3 million worked part time for "noneconomic reasons."
Keith Hall, who served as commissioner of the Bureau of Labor Statistics between 2008 and 2012 and is now a senior research fellow at George Mason University’s Mercatus Center, says the proportion of jobs in the economy that are part-time has been climbing and is now 19.4 percent, up from 17.4 percent just before the recession.
Some analysts predict the percentage could rise even higher if businesses seeking to avoid paying insurance premiums for full-time employees under the Affordable Care Act (Obamacare) downshift large numbers of positions to part-time.
The two-year rule for counting part-time income has been an industry standard for years, and was recently incorporated into regulations adopted by the Consumer Financial Protection Bureau. The rationale is straightforward: If part-time income hasn’t been established for an extended period of time, it may not be dependable or available in the future to make monthly payments on a mortgage. The industry also has restrictions on qualifying seasonal income and overtime earnings.
Equally important, in an era of conservative underwriting and full documentation, there’s little likelihood that Fannie, Freddie or FHA will loosen their standards. So homebuyers with part-time income need to know the sobering fact: You may assume that all income is equal. But it’s not.
By
SEP 19, 2013 1:18pm ET
The Federal Reserve decision
The initial reaction was seen on Wednesday, when Mortgage Industry Equity Composite component
Brent Nyitray, director of capital markets at iServe Residential Lending, answered his own question about the effect on interest rates.
"The markets will now begin to fret about the December meeting, which isn't going to be bond bullish. I think if you are considering locking right now, you do it. 2.7% seems to be resistance on the 10 year, and we could be looking at a 2.7% to 3% trading range. At these levels, take the money and run," Nyitray said.
Fannie Mae chief economist Doug Duncan said that the Fed has provided consumers with another "window of opportunity" to refinance or purchase a home at low interest rates.
"The revised Fed forecast more closely aligns with our growth forecast since the beginning of the year. Overall, this is a positive for continued recovery in the U.S. housing market but extends the risk that QE policy will result in market distortions both domestically and globally," he commented.
Fitch Ratings said the decision will lead to increased origination volume in the near term. The Fed announcement should reverse some of the market trends which occurred as rates rose in recent months.
It added, "While still representing a very modest part of the mortgage market, a short-term boost in mortgage volume may also result in a modest
An analyst’s report from Keefe, Bruyette & Woods talked about the impact on mortgage real estate investment trusts. The delay, it said, has both short- and medium-term implications.
"It’s a funny place they’re left in, as a steeper yield curve presents a better net interest spread environment for mREITs (all else being equal), but the process of getting there can be painful for book values for REITs not fully hedged. In the very short term the sharp curve flattening favors less hedged REITs that have sold off sharply," said KBW.
Tapering expectations will likely continue to hang over the sector going forward and its general bias is toward those REITs more fully hedged.
Mortgage-backed securities basis could retighten, which it called a positive. "If we had to guess we'd expect a modest tightening that could add a couple percentage points of positive impact to book values across the group. There are agency MBS specific dynamics that lead to basis widening as rates rise, which we believe has occurred over the past several months," KBW said.