Whether you’re a first-time home buyer, fresh out of college and accepting your first job offer or a seasoned homeowner who’s looking to relocate for a change in career, getting a mortgage with a new or changing job can be a bit complex.
With so many exciting changes – a new job, a new house – remembering all the paperwork and processes you’ll need to get approved for a home loan can be overwhelming. Luckily, we’re here to make the complex simple.
Let’s discuss how lenders look at employment and how a new job or change in career might affect your mortgage qualification.
How Do Lenders Look At Employment?
During a process called the verification of employment (VOE), the underwriter of your loan will contact your employer either by phone or written request to confirm that the employment information you provided is correct and up to date.
This is an important step because a discrepancy in the information you provided, like a recent change in jobs, could raise a red flag and affect your ability to qualify for the loan. We’ll talk more about that later.
When underwriters look at your employment, they’ll typically obtain information such as your position title, length of employment and even the likelihood of your employment to continue.
They’ll also consider your income (the amount, the history and the stability) in order to confirm that you have the means to make your mortgage payments each month.
How Long Do I Need To Have A Job To Qualify For A Mortgage?
In the simplest terms, underwriters look at your employment and income as your ability to repay the loan. Therefore, they’ll usually request documentation of a two-year work history in the form of:
- Tax returns (federal and income)
- Recent pay stubs
- Written or verbal VOE from current employer
This process is important because your income will determine how much home you can afford and the interest rate you’ll pay on the loan. Lenders are looking to see that you’ve been in a place of stable employment for at least two years, with no gap in your employment history.
Before we move on to how changing jobs could affect your ability to get a mortgage, let’s take a moment to discuss how underwriters look at different forms of income and what happens when your income changes.
How Lenders Look At Different Types Of Income
Beyond the length of your employment, underwriters will look at your income to determine whether or not you quality for a loan and how much you qualify for. Income that can be considered to qualify for a loan is called qualifying income.
While there are many different types of income, we broke down the five most common types and how underwriters determine qualifying income for each type:
If you earn an annual salary, your underwriter will take your annual gross income (income before tax) and divide that number by 12 months to determine what your monthly income would be.
In the case that you earn an annual salary including a consistent bonus (at least for two years) and your employer confirms you will continue to receive a bonus, your underwriter can divide your last two years of bonus income by 24 months to add to your monthly total. This could come in handy to qualify for a larger loan.
Hourly pay gets a little more complex, depending on how your hours are calculated for your income. Typically, underwriters will multiply your hourly rate by the average hours you worked.
So let’s say you get paid biweekly: underwriters will determine your monthly income by multiplying your gross pay by 26 pay periods (that’s 52 weeks in the year divided by two pay periods). They’ll take the total and divide that number by 12 months in the year in order to determine your monthly income.
Overtime pay is calculated similar to a bonus, where your underwriter will consider two years of overtime pay and divide by 24 months to determine your monthly income.
However, if your overtime pay shows signs of decline, meaning you’re making less in overtime as each year progresses, your underwriter may not deem it as qualifying income.
If more than 25% of your income is from commission, your underwriter will consider your base income the monthly average of your past 24 months of income.
This means the underwriter will look at the total amount of gross income you made and divide your income for the past two years by 24 months.
Just like with any income verification, an underwriter will require at least two years of verified income to qualify for a mortgage when you’re self-employed. Verifying this is a little more complicated, but they’ll usually ask for additional documentation that may require some preparation.
This documentation can include an Internal Revenue Service (IRS) Form 4506-T, a Transcript of Tax Return. They may also contact your Certified Public Accountant (CPA) to assess the stability and success of your business, in regards to your ability to pay back your loan.
It’s important to remember that the way underwriters look at income will vary, meaning it’s best to talk to your lender regarding your income and qualification. Typically, if you have two years of work history and a steady, if not rising income, you should have no problems getting preapproved.
It’s important to note that if your income pay structure changed from something like salary to commission, underwriters may be wary about the changing structure of income and could raise a red flag during the qualification process – even if you’re making more money with a commission-based income. In this case, if you’re moving from an annual to commission-based income, underwriters will still want to see at least 24 months of income before loan qualification.
We’ll talk more about changing jobs next.
How Will Changing Jobs Affect Getting A Mortgage?
Because underwriters will request at least two years of work history, changing jobs during or shortly before going through the mortgage application process will raise a red flag to your underwriter – especially if you switch from a higher-paying job to a lower-paying one or switch job fields.
Generally speaking, if you immediately switch from one job to another within your same field and get equal or higher pay, that’s not going to be much of a problem. But, if you start in a new career field or take a lower-paying job, you may have a harder time getting your loan approved.
Additionally, if your job switches industries, particularly from a stable to less-than-stable field, or if you find you’re frequently hopping from job to job without a pay increase, it may appear unsteady to an underwriter.
If you do find your pay structure or job position changing during or before the home buying process, it’s best to be proactive and speak to your lender. Typically, they will request:
- An offer letter
- A title change letter
- Most recent pay stub
- VOE from your employer
If you’re aware that your job position or pay structure may change during your home buying process, make sure you’re communicating these changes to your lender, too.
How Can I Get A Mortgage When I’m Relocating?
It is possible to get a mortgage when you’re relocating for a job, but it can get complicated.
Generally speaking, it’s best to get preapproved for a mortgage before changing jobs or locations. However, if you use the loan preapproval more than 25 miles away from your current job, your underwriter may require a note from your existing job documenting that they understand you are moving and will allow a long-distance working arrangement. If you’re getting a new job, they’ll need documentation of that as well.
However, underwriters will again want to make sure that your new job will be in the same field with equal or more pay.
It’s best to talk to your lender before making the big move, as they’ll know how you should handle everything and what you’ll need to move through the mortgage process.