A new job or a new mortgage? It's difficult to have to pick which of two wonderful things you want most, particularly when both of them are important steps forward in life. It's a tough choice but one you may not have to make.
You may have heard that lenders require that a borrower must have worked the same job for at least two years before qualifying for a mortgage loan. However, in many cases, you can accept the new job and work around the lender's concerns, particularly if you have good credit.
A Lender's Primary Concerns
Anyone lending money hopes and expects to be paid back. Think about it: If you are loaning money to a stranger, wouldn't it be a top priority to figure out your chances of repayment? Banks and other lenders put eligibility rules in place to increase the chances that you will repay the loan under the terms of the mortgage. To that end, the lender wants you to have:
- A practice of paying debts on time
- A salary that is sufficient to pay your monthly bills
- A stable employment history
All three of these factors are important when you are applying for a mortgage. Your three-digit credit score, ranging from a low of 300 to a high of 850, reflects your bill-paying habits. Your debt-to-income ratio (DTI) compares your monthly debt obligations to your monthly salary. To show a stable employment history, many lenders like to see at least a two-year history at the same job. However, insiders say that an excellent credit score and DTI ratio will go a long way toward making the lender more flexible about employment history, and there are many ways to get around the challenges.
Stable Employment and Upward Mobility
The general rule is that you must have been employed at the same job for two years to qualify for a home loan with a mortgage lender. That can set up a collision course with a new job offer or a planned job change. However, while the principle of steady employment is important to lenders, if you can show upward job movement in the same employment field, you should not have any trouble obtaining a mortgage.
For example, if a young attorney gets a job as an intern in a law firm and is then hired as a junior attorney and — just before applying for a mortgage — is offered a position as a partner at a higher salary, this will make the borrower a better credit risk, not a worse one. The lender will not disqualify the borrower because of the job change. The borrower should submit a resume showing that his current job is in the same field (and the same firm, in this example) as the prior positions.
What if the better job is with another similar firm? For example, if the attorney is offered a partnership position at a bigger firm downtown at a higher salary, the lender is not going to object to this job change either. As long as the attorney can submit a letter from the new firm with a job offer and a start date with a higher salary, the lender will approve the loan. Generally, the start date must be within 60 to 90 days from the closing, and the letter must be signed by both the new employer and the borrower.
New Field or Lower Salary
On the other hand, an applicant who is moving from one field to another may not be viewed so favorably by the lender. If the young attorney quits the law firm and signs on as a waiter at a pizza parlor, he may not get the same favorable loan treatment, especially since his salary is likely to drop. Since the individual has no prior work experience in the new field, the lender cannot be sure that he will be able to retain the job over time.
Likewise, an applicant who moves from a salaried position to a freelance, independent contractor or commission-based position may not qualify immediately for a mortgage loan. These types of jobs are considered self-employment rather than regular employment. Generally, you must show two years of 1099 tax forms and self-employment tax returns plus a current-year profit/loss statement before qualifying for a mortgage. However, one year may be sufficient if the loan is approved by Freddie Mac or you have top credit and a strong financial profile.
Similarly, if you move from a fully salaried position to one with earnings based largely on commissions, bonuses or overtime, the lender may not be satisfied that your income is stable. Since these kinds of income are usually not guaranteed, the income is not stable from the creditor's point of view. However, if you can show that the commissions or bonuses are stable parts of your income, the lender is likely to accept the change. This may require six months or so of pay stubs that regularly include the commissions, bonuses or overtime.
College Graduate or Veteran
Another big exception to the two-year employment rule is when you have just completed college, graduated from trade school or retired from the military. All of these "endings" are also considered new beginnings and can result in favorable treatment.
For example, recent college graduates who are taking a new job can be eligible for a mortgage loan despite not having two years of employment history in the field. You can submit your college transcripts and degrees. If the course of study is related to your new position, the years of education can be used instead of years on the job. This is true for both graduates with no work history starting a first job and graduates who are changing their field of employment.
The same is true of trade school or advanced training in a trade. A lender views certification or proof of advanced training as a ticket to higher earning potential. Both graduates of trade school and college graduates can apply for a mortgage loan the day they begin a new job. However, you can't close on a new house until you get 30 days of paycheck stubs or an offer letter.
A newly retired service member may also be able to use years in the military service in lieu of two years of employment, especially for loans guaranteed by the Department of Veterans' Affairs. This is only true if your new job duties are related to your work in the military.
Cash Reserves Requirement
Naturally, if you are getting a mortgage before you have started your new job, the lender wants to see sufficient cash reserves to cover mortgage payments and regular monthly bills in the meantime. What exactly are cash reserves? You don't need to have a wad of bills under your pillow, but these should be funds that you can convert into cash readily. Checking and savings accounts are fine.
You'll need to show your lender bank statements (often 60 days' worth) proving that your cash reserves are sufficient to cover the interim bills until your new salary kicks in. Conventional lenders may even demand that you have enough cash in the bank to cover one extra month just in case the job start is delayed.
From Alaska to California, from France's Basque Country to Mexico's Pacific Coast, Teo Spengler has dug the soil, planted seeds and helped trees, flowers and veggies thrive. A professional writer and consummate gardener, Spengler has written about home and garden for Gardening Know How, San Francisco Chronicle, Gardening Guide and Go Banking Rates. She earned a BA from U.C. Santa Cruz, a law degree from U.C. Berkeley's Boalt Hall, and an MA and MFA from San Francisco State. She currently divides her life between San Francisco and southwestern France.