The Real Deal New York

How could growth in part-timers stall U.S. housing recovery?

The answer has to do with mortgage lending requirements

September 27, 2013 02:40PM
By Kenneth R. Harney

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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, 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, said 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, also known as 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.

Kenneth Harney is a syndicated real estate columnist.

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