How to Qualify Mortgage Applicants’ Secondary Income and Employment (Part 1)


How to Qualify Mortgage Applicants’ Secondary Income and Employment (Part 1)

July 25, 2023
Certified Credit

From freelancing to gig work, there are many employment options available today outside of the standard nine-to-five. As a result, many Americans are mixing and matching occupations to optimize their incomes. In fact, an estimated 16 million Americans, or 10% of the United States workforce, currently have more than one job.[i]

This trend poses an important question to mortgage lenders and underwriters looking to qualify more borrowers in the modern economy: How should secondary income be included in the mortgage eligibility equation?

In this article, we’ll explain how second jobs can impact mortgage eligibility. We’ll also highlight some tools that can make the verification of income and employment (VOE) process more efficient.

The Stark Rise in Secondary Employment

To start, it’s important to understand why people pursue secondary employment. Some of the leading reasons include the:

    • Rising cost of living – As inflation reaches new heights, 67% of Americans report feeling concerned about the cost of living.[ii] As such, some are taking a proactive approach to their finances and seeking out secondary employment.
    • Prevalence of remote work – The COVID-19 pandemic popularized remote work and changed the way that many companies do business. As of 2023, 27% of Americans hold remote positions.[iii] Without time-consuming commutes to contend with, many of these workers are monetizing their free time by starting side businesses. Some especially savvy employees are going as far as to work multiple full-time remote jobs simultaneously.[iv]
    • Thriving gig economy – Another notable shift in the workforce is related to the gig economy. Thanks to some big-name digital platforms and popular apps, an increasing number of people can earn money while maintaining a flexible schedule as ride-share drivers, food delivery people, dog walkers, or social media influencers.
    • Freelancing – The internet has also made it possible for professionals to acquire freelancing clients from across the globe. For instance, someone with a full-time job can add freelance copywriting, video editing, or graphic designing to their evening routine to rake in some extra cash. Currently, over 90% of Americans are considering freelancing or taking on independent contract work in the near future.[v]

Based on these trends, it’s clear that having more than one job is only becoming easier and more prevalent as time goes on. Thus, mortgage lenders must learn how to navigate this fast-evolving employment landscape.

Can Secondary Income Count Toward a Mortgage?

People who work multiple jobs are often eager to list their extra income on their mortgage applications. Unfortunately, these borrowers may be surprised to learn that secondary income doesn’t always qualify for mortgage loans, even if it arises from a lucrative side hustle. It must meet certain criteria to qualify.

As a mortgage lender, you can prevent disappointment by clearly explaining the rules regarding secondary income to your borrowers from the get-go.

When Can Secondary Income Be Used in Mortgage Qualifications?

Generally, an applicant must have a two-year history of earning a second income for it to qualify (though there are some exceptions). This rule is shared by both federally-backed and conventional mortgage programs.

Why is this? Well, working multiple jobs is not for the faint of heart. Neither is running a successful side business. Mortgage underwriters want to make sure that second-income earners can sustain their elevated workloads for the foreseeable future.

After all, some people may manage multiple jobs for a few months, only to lose motivation down the line. However, those that can keep it up for at least two years prove themselves to be true second-job success stories.

Are There Any Exceptions to the Two-Year Rule?

Like all rules, the two-year rule has some exceptions. These exceptions are alluded to in Freddie Mac’s guidelines for secondary employment history:

In most instances, the Borrower should have at least a two-year history of secondary employment for the employment to be considered stable. Under certain circumstances, when a Borrower has less than a two-year secondary employment history but has at least a 12-month history, the Seller may be able to justify and determine the employment is stable.”[vi]

As you can see, the key phrases in these guidelines are “in most instances” and “under certain circumstances.” Underwriters can include secondary income with 12-month histories on a case-by-case basis.

For example, consider a borrower who previously held a standard full-time job. After getting laid off 13 months ago, this borrower accepted two part-time jobs to make ends meet. Together, these jobs take up 40 hours a week and provide a combined income that’s comparable to the borrower’s previous full-time job. While their second job has less than two years of history, it may still seem reasonably stable to most underwriters.

Here’s another potential exception: A school teacher works nine months out of the year in their primary position. They accept a second job as a summer school teacher at the same institution. This second job fits in seamlessly with their existing schedule and makes sense, considering their primary line of work. Thus, an underwriter can easily justify including both incomes in the borrower’s mortgage calculation once the 12-month mark is met.

Examples of Non-Qualifying Secondary Income

Now that you know a few exceptions to the two-year rule, you may be curious about what secondary employment situations would be unlikely to qualify.

Here are a few examples:

      • A full-time engineer started moonlighting as an Uber driver 14 months ago. Now he wants to apply for a mortgage. Unfortunately, most underwriters wouldn’t be comfortable including the Uber income in his application due to the limited length of employment history.
      • A human resources manager starts posting reality TV recaps on Youtube for fun. After having a few videos go viral, her channel quickly becomes monetized and generates an impressive income. A year and a half into her newfound Youtube fame, she applies for a mortgage, only to find out that her online earnings can’t count toward her qualifying income just yet.
      • A virtual assistant starts bartending on the weekends and earns excellent tips each shift. After doing both jobs for three years, he applies for a mortgage. Unfortunately, he didn’t declare his bartending tips on his taxes. Since there’s little record of his secondary income, underwriters can’t take it into account.

As you can see, every situation has unique factors to take into consideration. If you’re on the fence about an applicant’s secondary income, you can always consult with your underwriting team for advice.

The Importance of Income Documentation

Speaking of taxes, it’s important to let your borrowers know that they can only include secondary income on their mortgage applications that they’ve formally declared on their taxes. If Uncle Sam has no record of it, underwriters can’t use it.

In addition to providing detailed tax documents, it can be helpful for borrowers to share letters from their secondary employers or side-gig clients that corroborate the stability of their employment.

For example, a part-time math tutor could have his students’ parents write letters explaining their intention to use his services for the rest of the upcoming school year. This assurance of future income may make his second job appear more stable in underwriters’ eyes.

Qualifying Additional Income: Verification of Assets & Tax Transcripts

It’s important that lenders are familiar with some of the origination process involved in qualifying borrowers’ additional income.

We recommend that your brush up on your verification of assets (VOA). A VOA will look at the borrower’s existing liquid assets, including: checking account, savings account, Certificates of Deposit (CDs), Stocks, Mutual Funds, Bonds, IRA/401(k), etc. And potential non-liquid assets, such as: Real estate, Cars, Artwork, Jewelry, Collectibles, Self-owned businesses, etc. (i.e. anything that can be converted to cash fairly easily).

VOA is a more labor-intensive and manual process, which involves submitting extensive paperwork to verify all their assets. It requires a range of documents, such as bank statements and tax returns for simpler assets. However, when it comes to complex and non-liquid assets, lenders may need to explore alternative methods to demonstrate their value.

We also recommend that you refresh on Tax Transcripts. In March 2023, the Internal Revenue Service (IRS) has recently released its new 4506-C form. This new form meets the standards of their anticipated OCR (Optical Character Recognition) software. The new 4506-C form can be found here. To learn how to use the new 4506-C form, you can check out our guide, here.

How Underwriters Weigh Secondary Income in Relation to Other Risk Factors

Underwriters’ primary objective is to verify an applicant’s ability to repay their mortgage. Thus, they consider many layers of risk associated with someone’s application.

In addition to an applicant’s income and employment, underwriters also carefully evaluate their:

      • Credit score
      • Recurring debts
      • Assets and savings

If these factors suggest a strong ability to repay, the underwriter may be a little more lenient regarding the borrowers’ length of secondary employment history (as long as it’s reached the 12-month mark). In contrast, if these factors indicate a higher level of risk, the underwriter may be less inclined to approve secondary income that doesn’t meet the most stringent standards.

Non-QM Mortgages: A More Lenient Lending Alternative

Borrowers who earn lavish secondary incomes may be frustrated if they can’t obtain a federally-backed or conventional mortgage right away. However, these borrowers can always explore their options with non-QM loans.

Since these loans are priced for risk, they often require higher down payments and come with higher interest rates. However, some borrowers may be willing to accept their costlier terms to get into the housing market sooner than later.

Does Gig Work Impact a Borrower’s Credit Score?

Gig work itself does not directly impact your credit score. Credit scoring models typically focus on factors such as payment history, credit utilization, length of credit history, types of credit, and new credit inquiries. However, there are indirect ways in which gig work can affect a borrower’s credit score:

Income Stability

Gig work often involves irregular income or fluctuations in earnings. Lenders may consider stable income as a positive factor when assessing creditworthiness. If the second job provides a consistent income stream, it can contribute to a more favorable credit assessment.

Debt Repayment

If a borrower relies on a second job as their primary or supplemental income, it can help them meet their financial obligations, including debt repayment. Consistently making on-time payments towards loans or credit cards can positively impact their credit score.

Credit Utilization

Gig work can influence a borrower’s credit utilization ratio, which is the percentage of available credit that one is currently using. If gig work allows a borrower to generate additional income and keep their credit card balances low, it can help maintain a healthy credit utilization ratio, positively impacting your credit score.

Ability to Obtain Credit

If a borrower relies heavily on gig work, it might affect their ability to obtain credit. Lenders may scrutinize income stability and the likelihood of continued earnings when evaluating loan applications. This can indirectly impact their credit score if their unable to access credit or have to resort to alternative, potentially costlier, forms of financing.

It’s important to note that credit scoring models can vary, and lenders may consider additional factors beyond the standard model. It’s always advisable to maintain responsible financial practices, such as paying bills on time and managing debt wisely, regardless of employment type.

Certified Credit: Verify Borrowers’ Income and Employment With Ease

While secondary income may complicate the mortgage underwriting process, it can help some borrowers qualify for home loans under the right circumstances. Knowing how to identify these situations can make you a star mortgage lender in today’s market.

If you want to fortify your verification of income and employment (VOE) process, Certified Credit can help. Our automated VOE solution, Cascade VOE, can automate your primary and secondary employment verifications using low-cost vendors.

We also offer many other mortgage lending solutions that can make the loan origination process faster, easier, and more cost-efficient, including:

    • Automated lead generation and borrower retention tools
    • Automated prequalification
    • Automated undisclosed debt monitoring
    • Flood zone determinations
    • Fraud and risk support
    • Settlement services

Learn more about our innovative offerings by scheduling a credit consultation with our team today.

Want a deeper dive into the role of secondary income and its impact on mortgage underwriting? Check out this episode of our Talk Data to Me podcast.

Sources:[i] Inside Hook. Why Do So Many Americans Have More Than One Job?,are%20holding%20down%20multiple%20gigs.&text=It%20looks%20like%20the%20Labor,in%20its%20January%20employment%20report.

[ii] Open Access Government. The frightening cost of living in the U.S: a Price Index Review.

[iii] Zippia. 25 Trending Remote Work Statistics [2023]: Facts, Trends, and Projections.,U.S.%20companies%20are%20fully%20remote.

[iv] Slate. What’s Really So Wrong About Secretly Working Two Full-Time Jobs at Once?

[v] Charles Schwab. Gig Workers: How Are You Managing Your Money?,are%20freedom%2C%20flexibility%20and%20control.

[vi] Freddie Mac. Primary and secondary employment and income.,in%20accordance%20with%20Topic%205300.