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?

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

      Tom —
      They can consider your new income. See the “Income” section of this post for more: Think You Can’t Afford to Buy a Home? Think Again.

    • ScottSheldonLoans

      Yes your new income is going to take the anchor position for qualifying because it is directly related to the field you were studying for.

  • Liliana

    I took 1 year off due to maternity an I recently started working again. I did not file my taxes for the 2014 year for the same reason. I have been working in the same industry for over 3 years though. What are my chances of being able to purchase a home?

    • ScottSheldonLoans

      If you have your 2013 and 2012 federal income tax returns completed and you can provide to a mortgage company your IRS filled out extension form you should be eligible to apply and get qualified. As for the rest of your chances, there is a multitude of other things so there’s really no one way to say yes or no, but as for your maternity leave that should not preclude you from your ability to qualify.

  • ScottSheldonLoans

    Anytime…but, lender will need the offer/acceptance letter and at least one pay stub supporting the new job.

  • ScottSheldonLoans

    Yes when you receive a w2 again you will have an easier time. Lenders need at least 24 months of self employed 1099 income. This is evidenced with two years of federal income tax returns.

  • ScottSheldonLoans

    Share with us the specifics of your situation and I can give you some feedback. This is too blanket of a question to answer because it is not that black and white.

  • Debbie

    Well the real situation is that I live in a house that I inherited from my mother who dies in Nov. We created a living trust to accomplish this and at the time I thought that not assuming the loan or refinancing would be fine because I didnt qualify anyway. So I was just going to continue to live here as I have been doing for 5 years prior to my mothers death and be put on the loan as an authorized 3rd party which would allow me to do everything related to the property such as rent it out or live here but not modify the loan or put my name on it. But now I am finding it difficult to make the payments with a huge loss of income from working as her caregiver and also loss of her soc sec, benefits combined with my income which made up the overall income to pay the bills. The house has a lot of equity but the interest rate is 5.37 and by lowering it to 4% I could drop the payments to a much more manageable monthly payment if I was able to get approved. Thats the issue. I tried a loan modification thru a federal program for those who face hardship but cant get approved because the loan isnt in my name. My name isnt on the title either but this is not an issue because I have to be on the loan to get a modification and for the bank to work with me. In order to refinance I was told I need to work full time which meas 36-40 hrs a week which for me in order to keep my ssdi benefits would mean like 6.50 an hr to total 1.090 a month which is the maximum I can earn monthly and not lose my disability benefits. Also I was told by a mortgage broker that I have to work in the same industry which is health care and that my 2 year work history needs to be looked at as far as income. I only made 24,000 in 2014 and the same in 2013, and if I earned that same amount now, approximately $2000 per month than I cant get approved to refinance a loan for 125k which is what I need. I would need to bring the loan down to 95,ooo to qualify with only $2,000 a month income.But if I worked and made $2400 a month for 2 months they said I could possibly get approved to refinance the 125,000 using the current income( meaning I earn over the limit for social security and lose my ssdi benefits) but I can maybe qualify to get the mortgage approval. This approval is based on credit score of 680 and a property valued at 320k with obviously a lot of equity in it and a 5 year payment hisport in which I as my mothers power of attorney payed very aggressively to pay down the mortgage using my own money. Yet that doesn’t even seem to be able to be taken into account since the loan was not in my name. I feel so boxed in and dont know what to do. The current mortgage is $1445 and I want desperately to reduce it to about $1050 which if approved at 4% I could do but to get that approval seems next to impossible and to get a principal reduction or loan modification doesn’t seem to be an option the bank will discuss either since I am not on the loan. I am not even sure if I could get a job making 24,000 and even if I did I would be in pain doing it which is why I am on disability for my back, but I must lower this mortgage to survive and not have to sell my house. Besides its stupid to pay 6,000 more a month for the same mortgage and its makes it that much harder to pay my other bills being low income as it is. Do you have any suggestions? Please help.

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

      Debbie – I wish I could advise but it’s simply beyond my area of expertise. You may want to talk with a non-profit housing counselor who can help you understand programs available for your situation. You can visit HUD.gov for a directory. I hope they can find some options for you.

  • Debbie

    Just one last thought on my delema. Why is it that if I have a house with 200k equity,than why isnt that sufficient as collateral in being given a loan? Isnt the risk involved minimal for a bank since they can take my house at anytime if I default and the fact that the market wont fluctuate drastically at this point in time should give them total security that the bank would never lose money on such a loan. So I dont get it. Why isnt that alone a major deciding factor by which a lender would be willing to approve me?

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

      Many loans are packaged and sold. The lender doesn’t keep the loan. And they can’t sell it if it doesn’t meet certain parameters. Also, it’s expensive and often difficult for lenders to foreclose on a home.

    • ScottSheldonLoans

      Debbie,

      Geri is correct.There is a lot of things in today’s lending environment that do not make sense. This classifies as one of them. Obviously if you have that much equity in your home you are vested in continuing to make the payment obligation. The problem is that if there is no income on paper to offset the debt,the lender can’t justify making the risk iegranting you credit when there’s no ability to support it other than equity. There should be a program out there for people like this and I see it on the horizon, but probably not for at least a few years if not longer.

  • dr. james

    I’m a veterinarian about to move states and start working for a non-profit part-time. The part time pay will be close to what I was making full time at my last job. I’ve just been doing locum work for almost a year. I was told that banks do not consider non-profit income if they are funded through grants. Is this true? I will also be starting a clinic and I know that income is not eligible until it has been running for 2 years. Thanks.

    • ScottSheldonLoans

      Hello Dr James,

      I have not heard that before. However, if your nonprofit has the possibility of being unstable, the lender might want some sort of proof of continuance of that job being viable. If you work full-time and on a salary, and you switch to being part-time, my guess is the part-time income even though it’s more is still going to be considered hourly yes? If this is the case, the income is not the same in your income will be averaged year-to-date at best. This change could prevent you from qualifying as you’re going from full-time to part-time unless it’s etched in stone what you’re part-time hours will be and there is no variance to those hours. If you have the ability to switch to being full-time prior to looking for a home on a salary basis, you’d have a much easier time with procuring financing.

  • charlie todd

    I have been with the same company for 12 years, however I just switched this month over to commission only, Im still with the same company–.I will be making more money than I was on salary basis. How will this effect me buying a house in a couple of months?a

  • charlie todd

    My husband has been with the same company over 12 yrs, this month they moved him from salaried to commission only. It will be more income however we were planning on buying a house this summer. How will this effect us getting a loan?

    • ScottSheldonLoans

      I would have a conversation with a lender in your area who can best advise. This very well could prevent the commission income from being used because there is no history of it. Usually lenders want a 2 yr average of commission income.

  • weluvourhouse

    Hello my husband and I are in the home buying process now. Our appraisal was just ordered. We are supposed to close on our house by June 2nd. Something discriminatory happened with my job, I had to miss work, and I ended up putting my two weeks notice in today for fear that I would be terminated. I made good money but was a contractor so had no job security. My last day is now set to be May 26th. At what point is our mortgage lender going to ask about my job again and/or check my credit? Do they check it the day of closing? I am not sure what to do. We don’t want to lose this house. Should I go back to work and beg them to let me work longer?

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

      I checked with Scott and he confirmed my first instincts, which is that you need to talk with your loan officer now, and not wait until they find out later. He says this could be a big problem if not properly handled. Reach out to your loan officer asap and let them know.

  • Susan

    I am a salaried employee and accepted a new position twice in the past three years in the same institution with a raise in salary at both times. Do I need to give an explanation of my pay increase in the past three years to my lender for refinancing?

    • ScottSheldonLoans

      No as long as the income raises are justified, no reason to have to explain all of the details.

      • Susan

        Thank you!

        • ScottSheldonLoans

          Good luck! thanks for the post

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