Yael Ishakis, a loan officer for First Meridian Mortgage, rejected an application three weeks ago from a woman who had a high credit score and a 20 percent down payment.

The 47-year-old home health aide needed the combined income from her full-time position and a part-time night job, which she held for 18 months, to qualify for the loan. The hitch: new federal rules typically require two years at a part-time job before those wages can be included in an application.

“She cried when I told her,” said Ishakis, whose company is based in Brooklyn, New York. “She had worked day and night to save for the down payment and had already found a house she wanted. If we could have used her second job, she could have gotten it.”

As the economy produces an increasing number of part-time jobs, that trend is colliding with rules that limit their value for homebuyers. The restriction, enacted after the housing crash, makes it more difficult for lenders to consider secondary income, resulting in a growing pile of loan denials, said Susan Wachter, a finance professor at the Wharton School of the University of Pennsylvania.

“We have a lot of young, creditworthy families who are being kept out of the market,” said Wachter, a former policy adviser at the Department of Housing and Urban Development. “If they try to supplement their wages with extra jobs, it’s hard getting lenders to consider that income, even with a consistent track record.”

Two-Year Rule

The Consumer Financial Protection Bureau introduced the Ability to Repay rule, or ATR, in January to prevent borrowers from getting mortgages they can’t afford. Part-time wages can be included by banks in determining the ability to repay a mortgage if an employer verifies that the borrower has worked at the job for two years and will continue to do so. Lenders may consider a period of less than two years if they have a reasonable explanation.

The issue isn’t the rule — it’s how lenders interpret it, said Pete Mills, senior vice president for residential policy for the Mortgage Bankers Association in Washington. Banks are concerned about “potentially draconian” penalties for violating ATR, so they are being conservative when evaluating applications, he said.

“We don’t have a long enough track record to see how ATR is going to be enforced, so lenders are staying well inside the credit lines,” Mills said. “When you have an application based on multiple jobs — those are hard to evaluate from a stability of income standpoint.”

Sam Gilford, a CFPB spokesman, declined to comment.

Second Jobs

About 7.8 million Americans worked two or more jobs in October, a five-year high, according to the Bureau of Labor Statistics. They accounted for 5.3 percent of all workers, up from 4.8 percent a year earlier.

Even borrowers who have held their part-time job for more than two years run into obstacles because their employers are reluctant to sign forms verifying that their position will continue, said Keith Binsfeld, a mortgage banker at Huntingdon Valley Bank in Warminster, Pennsylvania.

“Second jobs, by their nature, aren’t long-term engagements,” Binsfeld said. “The guy who owns the gas station where you’re moonlighting may not know how many people he’s going to need next month.”

Borrowers also have to cope with ambiguities in the requirements. Lenders can consider a series of part-time jobs to meet the two-year rule — as long as the positions are in the same industry.

“You can’t go from working in a department store to working at McDonald’s,” said Ishakis of First Meridian Mortgage. “It makes you look unstable.”

Loan Denials

Without part-time income, some borrowers no longer meet the debt-to-income ratio used to measure the ability to repay, disqualifying them for a mortgage. Fannie Mae and Freddie Mac, the government-run companies that buy and back most U.S. mortgages, cap the ratio at 45 percent. For loans insured by the Federal Housing Administration, the maximum is 43 percent.

“Conservative underwriting really is in the best interest of the borrower,” said Joe Parsons, a loan officer and branch manager for PFS Funding, a lender in Dublin, California. “We’re not doing anyone a favor if we qualify him on a source of income that dries up. We could be getting him into deep trouble.”

Binsfeld of Huntingdon Valley said the part-time rule shouldn’t penalize borrowers who hold a variety of part-time jobs. Before the new regulations, borrowers often could document their income from second jobs by showing steady deposits into their bank accounts for one year.

Financial Crisis

“The verification shouldn’t be tied to a particular job or even type of job,” he said. “If you have a track record of bringing in extra income, and you’re paying taxes on that income, it should count.”

Many part-time workers are trying to make up for ground lost during and after the 2008 financial crisis. By mid-2011, wages hit bottom and started a slow climb that hasn’t kept pace with inflation, said Gordon Green, a partner at Sentier Research LLC.

Wages in June were up about 4 percent from August 2011, according to Sentier’s analysis of Census Bureau data. Inflation rose 5 percent in the same period, according to the Bureau of Economic Analysis.

Wage Growth

“Even though the recovery officially began in June 2009, income continued to go down,” said Green, who previously worked at the Census Bureau’s income and poverty statistics program. “It didn’t bottom out until 2011, and it still isn’t back to where it was.”

The U.S. median household income was $53,940 in June, according to the Sentier analysis. Adjusted for inflation, that’s almost 7 percent below the January 2008 figure.

The sluggish wage growth and stiffer lending rules have shut out first-time buyers even with mortgage rates hovering around 4 percent. They accounted for about 28 percent of home purchases this year, down from an average of about 41 percent in the prior 10 years.

Sales of existing homes probably will drop 3 percent in 2014, the first decline in four years, according to the National Association of Realtors. Originations of mortgages for home purchases are forecast to fall 13 percent to $638 billion compared with 2013, according to MBA.

Hard Work

“We have a generation of Americans missing out on the opportunity to own a home because they can’t get access to credit,” said Wachter at the Wharton School. “It’s keeping the mortgage market stuck in a no-growth scenario.”

The home health aide whose application was rejected still hopes to buy a home, said Ishakis, the loan officer. In six months, she’ll have worked her second job for two years and the income can be included on her application.

“She will get a house eventually if she keeps working as hard as she has been,” Ishakis said.

Actual link: http://www.bloomberg.com/news/2014-11-25/moonlighting-no-help-to-americans-seeking-to-buy-a-home.html