Handling a Mortgage with a Gig Economy Job

The majority of people have some experience in the “gig economy,” but many have made it their livelihood. If you make all or most of your income through rideshare, freelance, or app-based services, you’re likely wondering if this type of income can be used to obtain a home. While it may be more difficult than it would be with a salaried position, obtaining a mortgage with a gig economy job is not impossible.

 

Most mortgage lenders will verify your income to determine how much mortgage you can afford, but if it can’t be documented (or if it is documented in an unusual way), you might run into trouble. However, large mortgage financiers like Fannie Mae and Freddie Mac are already discussing options and beginning to take action for gig economy-reliant individuals. This means it should be easier for you to get a mortgage, even if the process is not yet completely clear. To that end, the cooling mortgage market may result in a more expeditious effort to get more customers in the door, meaning this process is likely to speed up.

 

Freddie Mac recently predicted that 43% of U.S. workers will be freelancers by 2020—up from just 6% in 1989. These positions are, essentially, jobs that allow the individual to put in the hours and time they can. The workforce behind companies like Uber, Lyft, and Postmates choose the hours they work to perform deliveries and driving-oriented tasks, while those who use Airbnb or Turo rent out their homes and belongings to others to turn a profit.

 

While many Americans have experience in this economy, most use it to supplement their existing income. Some also use it to meet a specific goal, such as saving for a down payment on a home or to qualify for a mortgage. While this provides an essential income boost for most, it introduces ambiguity to financial health; in the past, income was fairly straightforward, which allowed mortgage lenders to easily assess a person’s income and debt-to-income ratio. The gig economy is fluid, which inhibits the lender’s ability to make a sound assessment.

 

So, what is the solution? We don’t yet have one, but it will likely have to do with technology. We anticipate that mortgage providers will begin to develop a calculator to facilitate the process of better understanding gig economy income. Freddie Mac has already teamed up with a company called LoanBeam to use a patented technology called optical character recognition. This program scans and extracts key information directly from a prospective borrower’s financial documents to calculate a qualifying income that can be used to obtain a home loan. Currently, this process is manually performed, which can lead to extended application times and miscalculations.

The gig economy is not going away, and more workers will begin to rely on its flexibility to supplement their income. Technology will need to catch up to the market, but we don’t see that process taking too long.

 

How to Save Money on an Existing Mortgage

In a previous article, we detailed the strategies new homeowners can deploy to undercut the costs of a new mortgage. While that article may be helpful for those in the process for purchasing a house, many of our readers are likely to already have a home mortgage. Every person with a mortgage should look for ways to cut costs, so we’ve developed this guide to saving money on an existing mortgage.

Let’s start with why this is important—using simple numbers. Say a homeowners has a 30-year, $200,000 fixed-rate mortgage at 5% interest. That sounds pretty reasonable, right? In fact, if you make your minimum required monthly payments, you’ll end up paying a total of $186,512 in interest over the life of the mortgage. That is almost as much as the principal. Finding ways to cut your mortgage and speed up payments could save you thousands of dollars over the period of repayment. Here are some refinancing options most homeowners can consider.

 

Add One Extra Payment Each Year

Making one extra mortgage payment each year can have significant long-term benefits. Extra payments are applied to your principal, not interest, allowing your balance to drop while preventing you from needing to pay interest on that principal. Using the above scenario, the homeowner can save around $36,000, cutting around 4.5 years off the life of the loan. In the life of your mortgage, paying an extra $1,100 each year, even if you take it from a savings account, can have significant long-term benefits.

 

Begin Making Bi-Weekly Payments

This is a great trick for sneaking in an extra mortgage payment each year. In paying half of your mortgage payment every other week, you will have made 26 payments by the end of the year—13 full payments. Using the above scenario, a bi-weekly payment is around $537. This will allow you to put that additional payment toward your principal, further cutting down on interest.

 

Refinancing Your Mortgage

This is the most common way to save money on a mortgage. By refinancing to a lower interest rate, homeowners can reduce their monthly payments and save money on interest. However, all mortgage holders should understand that there are costs associated with refinancing; you will want to ensure you have enough cash to cover refinancing fees. If you lower your mortgage by just 0.5%, you’ll end up saving around $85 each month. If the refinance itself costs $5,000, you’ll recoup the fees after 59 months.

 

Lump-Sum Payments

This option is not available to most mortgage-holders; if you had the money when taking out your mortgage, the loan amount would have, likely, been smaller. Still, a mortgage holder may come into a large sum of money through a substantial, job-related bonus or inheritance. Putting these funds into your mortgage is a great way to get the most bang for your buck. Let’s use our initial scenario, but say the homeowner receives a $20,000 bonus or cash inheritance. If applied to the mortgage during the first year of the loan, lifetime interest payments will decrease from $186,551 to $131,111—essentially saving you around $55,000 over the life of the loan. Plus, this type of investment will shorten your loan by close to six years. Furthermore, a lump-sum payment doesn’t have to be this substantial—it could be an extra $2,000 the first year, which would save you over $6,500 over the life of the loan.

Mortgage holders may feel they have few options to decrease the costs of their homes, but there are several easily implemented strategies. By investing just slightly more money in your mortgage, you can save thousands of dollars over the life of the loan. Talk with your lender about the options that will work best for your mortgage.

 

Different Types of Home Loans

When purchasing or building a home, investors and individuals must carefully consider the range of available loan options. Mortgage products each have advantages and disadvantages—some loans have smaller fees and lower interest rates while requiring large down payments, whereas others have small upfront fees but will cost thousands more throughout its life. There are loans for expensive properties, executive homes, and Veteran-specific home loans. If you’re even casually thinking about purchasing property, it is essential to review your loan options. This will allow you to understand the real cost of your mortgage—both upfront and over time.

 

Department of Veterans Affairs (VA) Home Loans

VA loans are available to veterans who have little cash but a good credit score. There are no strict limits on credit eligibility or debt-to-income ratios for borrowers, and veterans will need to obtain a Certificate of Eligibility through their lenders or the VA Loan Eligibility Center. Most underwriting items are left to the discretion of the lender, meaning there may be some variability in these loans. This is an excellent financing option for veterans, but those considering this type of loan should continue to consider other options. If you have cash and great credit, you will likely be able to find a better rate with a conventional loan.

 

Federal Housing Administration (FHA) Loans

An FHA loan is a great choice for those new to the housing market who might have few funds and a lot of debt. An FHA loan is the most forgiving of credit problems and low credit scores. Borrowers can finance up to 96.5% of the cost of their home, and the fees lenders can collect are strictly limited. An FHA loan requires both a down payment and a monthly loan insurance premium payment. Borrowers will also need mortgage insurance, which will add to the overall costs of over the life of the loan. However, the upfront portion can be financed into the loan, lowering the initial borrowing cost.

 

Conventional Loans

These loans necessitate higher down payments, better credit, and a lower income-to-debt ratio than FHA loans. Borrowers with excellent credit may only have to pay 5% down, but historically, borrowers have needed to pay 20% down. Conventional loans aren’t insured, but homeowners with this type of financing will pay a monthly premium based on the loan amount and credit score. Mortgage insurance may be canceled after two years if the home value has increased to provide 20% equity. However, if you have bad credit and several monthly debt payments, this may not be the loan option for you.

 

United States Department of Agriculture (USDA) Loans

USDA loans provide the best deal of all available mortgage products. Unfortunately, not everybody lives in an area qualifying for a USDA loan. Rates are set by lenders, but they are low and do not always require a down payment. However, there are several qualifying characteristics borrowers must have. Their income cannot exceed 115% of the median income for the area, and the home must be in an area targeted for rural development—often very out-of-the-way places that may not have good infrastructure. Finally, the home must meet USDA’s exacting standards, which can be difficult. However, if you find that you qualify for this type of loan, it is undoubtedly the best choice for your money.

 

Jumbo Loans

Jumbo loans are what you might expect—jumbo. These loans are used to purchase mansions and estates, which often exceed the borrowable amount through Fannie Mae or Freddie Mac. However, qualifying for this type of loan can be very difficult. A borrower’s credit score must be 700 or better, and the down payments are between 20% and 30%, which is meant to prove the borrower’s high income. There is no insurance for this type of mortgage, so lenders are often hesitant about providing this type of funding.

Mortgage choices should consider more than down payment and interest. Before making any decisions, utilize a mortgage calculator to determine if any of these choices is sustainable. Additionally, borrowers should understand that mortgage rates have been raising steadily for the past several months. Rates are rending in the high 4% range, and any rate under 6% is considered good, historically. However, both governmental and consumer behavior is only going to drive mortgage rates up. If you’re strongly considering purchasing a home soon, do it now—your rates will be lower, and your loan will accrue less interest over its lifetime, potentially saving you thousands of dollars.