Mortgages

Why Your Job Matters When Buying a Home

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Did you recently change jobs or receive a promotion? Despite what you might have heard, it is still possible to qualify for a mortgage to buy or refinance a home using your new income. The lending atmosphere is rife with misconceptions about job gaps, job changes and occupational changes within the course of an employment time frame. You can get a mortgage if you switched jobs or even changed industries, you just have to approach it the right way to seal the deal.

When determining your ability to pay (and therefore determining how much house you can afford), a lender will calculate your average income based on your pay from the past 24 months. It’s pretty straightforward if you’ve had the same job and same income and pay structure, but if any of those things changed in the past two years — or will change soon, you may face challenges when trying to get a mortgage.

In the past, lenders were ready to strike down loan applications in which there was a job or an industry change. Even real estate professionals will tell you not to change jobs before applying for a home loan. While that very well may be the case for most situations, it is not necessarily so black-and-white.

If you have had a job change, no matter what, a lender is going to need the following things from you — and your employer — in order to close on a mortgage: an offer letter, a role change letter if you have a title change and commensurate compensation package change, and the most recent pay stub and verification of employment.

How Lenders View Hourly Employees

Hourly employees are under the tightest microscope when it comes to getting a mortgage. Why? An hourly employee may have a set full-time schedule, which is ideal for lending purposes. However, if you work slightly less than a full-time schedule, with hours that fluctuate from week to week, this can muddy the waters.

The income gets averaged as long as you’ve been an hourly employee — even if you’re making more money now on a per-hour basis. That’s right, if you were making $40 an hour, and now you earn $50 per hour, the averaged income during the past 24 months – including the lower wage — would apply. So what can you do to get the higher hourly rate factored in to your ability-to-pay calculation?

Here’s what you’ll need from your employer: An offer letter, a current pay sub and a detailed description of the compensation structure with a new employer. These items could get you an exception due to relocation or an alternative circumstance. In either capacity, a most recent verification of employment can bridge the gap between how many hours worked in the year to date, supporting the new federal ability-to-repay requirements.

How Lenders View Salaried Employees

Lenders love salaried employees the most because a set salary streamlines the income calculation in the qualifying process. If you’re changing from one salaried role to another salaried role, despite a job gap, this should be no problem for qualifying for a mortgage so long as you can explain any gaps in the most recent 24 months.

Each job you’ve held in the past 24 months — even if you’ve held multiple jobs — all have to be detailed and itemized with dates so there is no gap in employment. If there is a gap in employment, the lender will need a written explanation detailing the transition. If you have changed jobs from one salaried role to another salaried role, with a different title and a different position — even within a different industry — that still should be fine for your lender as long as you are paid the same way — a flat salaried income.

What If You’re Salaried With Overtime, Commissions or Bonuses?

Have a new job? Or a new salaried role with big commissions, overtime or bonuses? If you do not have a history of this additional add-on income, it cannot be counted for use when qualifying for a new loan.

Here’s an example of a transition that a lender will find acceptable when calculating average income: A police officer has earned overtime plus salary for the past 24 months, and decides to change jobs to become firefighter with overtime potential. In this case, the overtime will be included in the 24-month average. The overtime, bonuses or commissions must be consistent during that time period for that type of income to be included in the average. A borrower can’t have a history of overtime, then change jobs and now have add-on commission income and expect the lender to include the add-on income in the 24-month average when there is no prior history of it.

Changing From Salary to Hourly Pay

If you are moving from a salary role to an hourly role, the lender is going to have to use your hourly income supported with a pay stub and verification of employment. As long as the change is within the same field and your title and role are similar, you should be in the clear.

Future Promotion or Raise On Deck

Congratulations, you’ve been offered a promotion! But first: Has it actually occurred yet? If not, you will be hard-pressed to get the lender to use the projected income, even if it is guaranteed.

If you cannot provide a pay stub with year-to-date income (usually a 30-day pay stub depending on your specific lender requirement), along with a letter detailing the change, you won’t get approved for the loan. Let’s say, for example, you are searching for the house and you know in the next four months your income is going to increase to $6,000 per month because you’ll have a new role within your company. In order for that $6,000 per month income to be used in the calculation, you’d have to get the details of the raise, including the role change letter and at least one pay stub.

So if you are thinking about getting a mortgage, even if it is further down the road, consider opening a dialogue with a lender now so you can be guided through any income bumps the past or future may hold. It is especially critical for homebuyers to get pre-approved with a lender upfront prior to house-hunting. This process includes allowing a lender to review your credit, debt, income and assets to assess your ability to qualify.

This is also a good time to start looking over your credit reports and checking your credit scores so you can address any problems in advance of applying for a mortgage. (You can check your credit reports for free once a year, and there are services that allow you to check your credit scores for free, like Credit.com.)

More on Mortgages and Homebuying:

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  • http://www.Credit.com/ Gerri Detweiler

    It will probably depend on whether you stayed in the same field in a similar position and similar pay. Would recommend you talk with a loan officer.

  • http://www.Credit.com/ Gerri Detweiler

    As Scott explained in his article: “The income gets averaged as long as you’ve been an hourly employee — even if you’re making more money now on a per-hour basis.” Whether or not that is enough to qualify you for a loan depends on the amount of the loan you are trying to get.

    • ScottSheldonLoans

      Yes hourly employees income is averaged. Income averaging is not necessarily problematic as long as the income is high in relationship to the proposed mortgage payment plus consumer liabilities if any.

  • steph

    My sister works part time for the past 4 years, got a promotion and several raises, but it’s still part time though. She’s going through the difficult process of getting approved for a mobile home loan. The manager says she would have a better chance if she was working full time at McDonald’s even though it would be less than what she makes on a part time basis! I feel that they are focused too much on how many hours she works than how much she earns. Her credit score is no problem if you were wondering. How is this possible? Is there a way around it? The manager says he’ll check around for research and get back to us Monday. I just would like to have a solid explanation if available to ease my anxiety until monday.

    • http://www.credit.com/ Credit.com Credit Experts

      Has your sister tried more than one lender? It may be that this particular lender’s underwriting qualifications include full-time work. But people who freelance or work part time can and do receive mortgage approvals, though perhaps not through the lender your sister is dealing with.

    • ScottSheldonLoans

      Yes, part-time work is very hard to determine income stability because it’s part time, and probably hourly right? I would exploring the possibility of a cosigner would be the least path of resistance if the lender will allow it.

  • ScottSheldonLoans

    If same field, immediately. If different field you can still apply, but, you may be subject to more scrutiny over your job history. There’s no way to determine how it would be reviewed without knowing specifics. Generally, if you change jobs and you go from being W-2 to W-2 you are fine in most cases. If you go from being W-2 to self-employed that’s a big red flag. If you go from being self-employed to W-2, you should be okay.

  • http://blog.credit.com/ Kali Geldis

    Hi Steve —

    It may not result in a rejection, but switching jobs right before applying for a loan may give you some new hoops to jump through in the lending process. Here’s an article we recently wrote that may address some of your big questions:

    http://blog.credit.com/2014/07/why-your-job-matters-when-buying-a-home-88105/

  • ScottSheldonLoans

    You need will need to provide an offer letter, and have in most cases,at least 30 days on the job supported with pay stubs in order to use the new income to qualify. It might mean getting an extension on your contract, otherwise, should not derail your loan at all, just may make it take longer. Good luck!

  • tom

    I graduated from college recently. I accepted a job in my degree field and have been working there full time as an hourly employee for approximately 8 months. My new compensation is significantly more than the previous two years, as the past two years were all part time Jobs while in school. How does working in my degree field affect how my income is calculated? Will they still average the past 2 years as my income or will they use my new income since I am working in my degree field?

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