Part-time earnings may not count for a mortgage

Part-time earnings may not count when seeking a mortgage

By Kenneth R. Harney

September 27, 2013

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 buy a house.

Isn’t income always income? If you make $42,000 from your regular
full-time job and $18,000 more 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 has 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
creditworthy 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.

But modest-income applicants are hardly alone in confronting the
problem.

Richard M. Bettencourt Jr., a branch manager with 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 persuaded him to accept
part-time positions with 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 company 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,” Bettencourt said. “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 because
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 this month by the Bureau of Labor
Statistics, 7.9 million Americans were employed part time “for economic
reasons” in August and 19.3 million worked part time for “noneconomic
reasons.”

Keith Hall, who served as commissioner of the Bureau of Labor
Statistics from 2008 to 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%, up from 17.4% just before the recession.

Some analysts predict that the percentage could rise even higher
if businesses, seeking to avoid paying health insurance premiums for full-time
employees under the Affordable Care Act, 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 the FHA will
loosen standards. So home buyers with part-time income need to know the
sobering fact: You may assume that all income is equal, but it’s not.

Source: Los Angeles Times

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