The era of life-long employment hasn’t been around for some time now. In fact, the average American changes jobs 10 to 15 times during their career.
In an age where “job hopping” is common place, how does this affect getting a mortgage?
From your lender’s perspective, your employment and income are paramount to your ability to make your payments.
There are “three C’s” associated with mortgage underwriting, one of which is a borrower’s “capacity” refers to the ability to pay their mortgage.
Lenders will not approve a mortgage to someone who cannot prove their capacity to repay.
Neither you nor your lender wants you to be without a home. As such, lenders will carefully calculate your income for the past two years to determine whether you can reasonably afford your new mortgage.
Generally, there are three different characteristics of your employment and income that are considered – the amount, the history and the stability.
In addition to verifying you have sufficient income, most lenders require a two-year history, and prefer a steady and consistent job history.
Underwriters will request documentation for any employment gaps or changes in income.
Changing Jobs During the Loan Process
Sometimes a new employment opportunity may come along while you are in the process of buying or refinancing.
If you plan to change jobs during the mortgage application process, it is important to tell your lender as early on as possible.
Changing jobs during the process does not always affect your ability to qualify for a mortgage loan. Some changes, though, can be more impactful than others.
For example, you may currently be an hourly or salaried employee who does not earn additional income from commissions, bonuses or over-time. If you are changing to a similar job with similarly structured pay, you may not have any challenges.
But if your new job has a substantial portion of your income will come from commissions, you may want to hold off on making this type of change prior to closing.
Commissioned, bonus and overtime income is generally going to be averaged over the last 24 months. Changing to this type of pay structure could cause headaches and possibly even derail your mortgage approval.
If you are thinking about going from a W-2’d employee to an independent contractor or starting your own business – don’t do it.
Although there are some loan programs that allow for just one year of self-employment history, most lenders want to see a two-year history of being self-employed.
Further, when you go from being a W-2’d employee to 1099’d, an underwriter cannot properly calculate your income without your tax returns.
This means your mortgage approval will need to be delayed until after you file your taxes. This will also mean you will need to pay any taxes owed before you can use your new self-employment income.
Other Considerations When Changing Jobs Prior to Closing
If you think you can accept that new employment offer now that your loan has been fully approved, think again.
Many lenders will do a final check to verify that that your employment and income hasn’t changed since your final loan approval was issued. Further, some lenders will require 30 days of paycheck stubs for new employment.
If you can’t provide 30 days’ worth of paycheck stubs, this could delay your mortgage approval. Worse, it could result in your mortgage application being declined.
Fortunately, for conventional loan borrowers, there are new guidelines that allow fully executed offer letters as long as all contingencies have been met.
These are all reasons why it is imperative to communicate any and all employment and/or income changes to your lender.
You Can Still Get a Mortgage If You’ve Switched Jobs
Your employment and income are two of the most important factors underwriters consider when approving your mortgage application.
Fortunately, switching jobs doesn’t mean you can’t get a mortgage as long as you approach it the right way.
If you are considering a job change during the mortgage process, it’s crucial to inform your lender as soon as possible.
Your loan application will need to be updated, and the lender will need to verify your income prior to closing.