Whether you are a line worker at a chocolate factory or program computers from home, with a couple of exceptions, being employed is a requirement of mortgage lending. I know that sounds like plain old common sense, but I get questions, lots of questions about employment. I want to take a few minutes today to go into detail and answer some of the more frequent questions I hear about employment.
To begin with - - the most basic component of this discussion, employment, is required to obtain a mortgage loan with these exceptions:
1) Retirement with retirement income
2) Social security or disability income
3) investment income
You will note the one thing these three have in common is an income stream and continuity. Lenders don't gamble on situations where the income stream may dry up a year or two down the road.
If you are someone who has a large amount of money saved or invested and aren't working, obtaining a mortgage through a mortgage lender is unlikely, unless your income is derived from your investments. There are investment companies that do offer secured mortgages based upon the investment portfolio, so if you are one of these folks, contact your financial advisor. I know that sounds unfair, particularly if you have enough money stashed away to buy the house four times over- - but if that is the case paying cash may be a good option.
Okay, so all the rest of us who aren't independently wealthy need to have a job. But that leaves quite a bit of room open for discussion as there are various types of employment - - full time, part time, seasonal, temporary, and self employment. Let's examine each of these in turn to see what the requirements are:
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Full Time Work: Full time work is considered the gold standard for mortgages. Typically full time is defined as 35+ hours per week or a salaried position.
Part Time Work: The number of hours you work on a part time job doesn't really matter as long as you have held that part time job for over two years. That is the only way the income can be counted. It is the same with seasonal positions-such as snow removal. There has to be a two year income history.
Temporary Work: Since the Great Recession there has been a large uptick in temporary workers. Some of the positions are low paying, but many in our area fill vacancies for better paying employers such as Subaru, Wabash National, Caterpillar and others. In fact, these jobs are often the gateway into these industrial companies. Most lenders require two years work at a temporary job or company prior to allowing the income as the basis for a mortgage loan. However one of the niche lenders we use only requires one year at a temp job before the borrower is eligible. Good to know.
Self Employment: There is a whole different set of rules for self employed people. If you are self employed you will need to show two years of tax returns and a profit and loss statement for the current year showing a net profit. The net profit is typically averaged to obtain the income. Accountants often show lower profits for tax purposes. Unfortunately what works for the IRS doesn't always work for lending. The average of the net profit will have to show enough income to meet the debt ratio for the home purchase. If you are self employed, have been taking losses, and think you want to do anything with regard to a mortgage loan, you will have to begin preparing two years out.
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A couple of other situations also need to be addressed. One is probationary periods. Many jobs have a probationary period in which the employer can assess the employee's ability to perform the tasks for the job and has the leeway to terminate the worker should they not meet expectations during the probationary period. For that reason, mortgage lending requires that all probationary periods for a new job be completed prior to final sign off on a mortgage loan.
In addition, experience or length of time doing a particular type of work is also examined. For those who wish to switch jobs prior to or while purchasing a home, it is best if the new position is similar to the old position in nature. For instance, a person with retail sales experience might want to stay in the sales field rather than taking a job such as teaching that requires a completely different skill set. If that occurs the lender might require six months to a year on the new job. However, a new graduate who had accepted their first teaching job would be eligible to obtain a mortgage after being on the job thirty days as they no doubt had education immediately prior to accepting the job which counts as experience. So if you have a new job in your field of study in school, your education counts.
If you want to obtain a mortgage, job hopping isn't the most convincing activity you could be engaged in, even if you are improving your economic circumstances. I once closed a loan for someone who had 27 different jobs in a three year span- - that was back in the bad old days of mortgage lending, the Wild West where about anything went. There is no way I could do that again in today's environment. So my best advice to you is if you really want a home, stick with a job for a period of time. It will be easier to get you approved. Lending likes stability.
Job offers can be tricky as well. To begin with, the job in question cannot be close ended. For instance many times positions at Universities or research laboratories are contingent on annual funding. These days no lender will approve a mortgage that the offer letter states the position is subject for renewal on a yearly basis. Three years is the standard. A lender will not close a mortgage based on a job offer alone. The borrower must be on the job, working and have completed all probationary periods and have received thirty days of paystubs prior to closing.
Last but not least are job gaps. Job gaps must be documented. What happened? Was the borrower laid off? Was there a maternity leave? Is the new position in the same line of work as the borrower held prior to the gap?
Two years of job history will be under the microscope-this doesn't mean that you have to have been working for two years, but it does mean if your work history is for less, you will probably want at least 12 months on the job if you accepted your job after high school graduation. As I mentioned before, post high school education counts as job experience if you are working in your field.
This blog has gone into the basics of employment and how it is applicable to mortgage lending. There are exceptions to every rule as well as different types of loans and different lenders may vary on employment requirements. However, since employment is an exceptionally important component of a successful loan application, an outline of standard requirements should be helpful.
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