The pandemic, and resulting surge in unemployment, has made it much more difficult for some potential homeowners to qualify for a mortgage. Lenders closely scrutinize your job history and gaps in employment could raise questions.
Lenders want to know not only how much money you make, but also how likely it is that you’ll continue to make that amount of money. And many are paying more attention to your current employment.
“There’s some heightened additional employment verification for people because of Covid,” says Jennifer Hernández, Houston-based senior loan officer with Legacy Mutual Mortgage. “A lot of people get surprised by this … the day of closing we have to verbally verify the person is still employed, because obviously we’re worried about layoffs.”
Even with the extra scrutiny of your employment situation, how you’re evaluated will still depend on your specific circumstances. Just because you know someone who was denied a home loan for not having the same job for two years, that doesn’t mean that will apply to you. “If a Realtor’s telling you, you don’t qualify, you shouldn’t give up. You should still talk to a lender,” says Javier Vidana, an Arizona-based real estate agent with My Home Group and one of the top real estate educators on YouTube. “Realtors like to say blank statements like, you have to have two years [of job history], but there are exceptions.”
Lenders also consider how long you’ve been at your job as well. Switching jobs can be a red flag to a mortgage underwriter. For some, it may not be a big deal. Getting a large pay increase could enable you to qualify for a bigger mortgage or better interest rate, but if that raise is from a less stable source than a regular paycheck (i.e., a bonus or commission) it may not have the effect you think.
So it’s important to talk with a lender or two to see how your specific employment record could impact your mortgage application, and understand what they’re looking for.
How Mortgage Lenders Evaluate Your Employment
During the closing process, your lender will likely need to confirm that you’re employed more than once, including on the day of closing. Aside from verifying you still have a job, it will also need to review two main things:
- Job history
But it’s not just a matter of sending in your resume and a pay stub. There’s a lot of nuisance in how a mortgage underwriter interprets your job history and how your income is determined.
So you should be prepared with documentation that can answer these two questions in detail:
What’s your employment history?
In general, lenders want to see two years of job history, but it doesn’t necessarily need to be with the same employer. “We need to see that you’re employable,” Hernández says. But there are exceptions to the two-year requirement, such as if you’re a recent graduate. “If you’ve been going to college to be an engineer, it takes multiple years. Once you’re graduated and you get a job that time in college counts,” Vidana says.
If you’re not a recent graduate and have been working for less than two years, maybe you had a lapse in employment or took time away from your career to raise a family, it’s possible to explain your situation. If we have someone that’s been out of the workforce a long time, we try to tie together past employment to tell their story, Hernández says.
A recent change in career can be okay, as long as it’s not part of a pattern or you’re staying in the same industry. But, if you get a new job and it changes the way you’re paid, or you’re getting paid less, that can be an issue. “The biggest problem that I see is, if the way you get paid switches from W-2 to 1099, that’s a big red flag,” Vidana says.
Going from W-2 to 1099 income means you went from being a traditional employee to being an independent contractor or self-employed. And 1099 income is considered less predictable than W-2 income. In that case, you may need to wait up to two years before your 1099 income is factored in your mortgage application.
If you’re self-employed and have been in business for more than five years, consider a conventional mortgage because you’ll need to provide only the previous year’s tax return.
So regardless of what your employment history is, you need to be able to show the mortgage underwriter that there’s a high likelihood that you’ll be employed well into the future.
How do you make your money?
If you’re a traditional salaried employee who gets a W-2 tax form every year, you’ll have a much easier time verifying your income. But for other less stable income, lenders usually need to see at least a two-year history. And in this case, your income is typically averaged out over the previous two years.
This applies to anyone who is self-employed, a freelancer or independent contractor, such as driving for Uber, which is usually documented on a 1099 tax form at the end of the year. Even part-time jobs that earn W-2 income may be subject to more strict standards. For second jobs, “you have to have a two year history, showing that you carried two jobs, to use that income,” Hernández says. “We have to know that you’ve been able to handle those hours on a consistent basis.” The two-year requirement may also apply to money you earn from overtime, bonuses, or commissions.
While you’ll typically need to have two years of history for any income you earn outside of a ‘regular’ job, there is an exception. For conventional mortgages you may only need the previous year’s tax return, if you’ve been in business for five years or longer. This is advantageous if last year’s profits were higher than the year before.
In the end, not all income is looked at in the same way. So when you’re determining how much house you can afford, only factor in income you can consistently rely on.
When it comes to getting approved for a mortgage, proving that you currently have a job or other source of income is only the first step. You also have to meet certain guidelines surrounding your employment history. And how your income is determined varies depending on if you are self-employed or earn money outside of a traditional job that earns W-2 income.
However, as long as you meet the minimum standards for the type of mortgage you’re applying for, lenders do have some leeway beyond that. So exceptions to the rules may apply to your individual circumstances.