There are plenty of requirements you must meet when applying for a new mortgage or when you plan to refinance your existing loan. Lenders will look at your debt levels, income and credit score. They’ll also look at your employment history. Fortunately, getting a mortgage with a new job is far from an impossible task.
The general rule has been that lenders prefer to work with borrowers who have worked in the same field for at least two years. But this rule comes with more leeway than do other underwriting requirements. Because of this, mortgage lenders are more willing to overlook a job history filled with fresh starts in new careers than they are a low credit score or a high debt-to-income ratio.
And this is good news for applicants who have started a new job just a month or two before applying for a mortgage.
Steady salary is what matters
Kris Shenton, sales manager with Equity Prime Mortgage in Crofton, Maryland, said that a new job isn't always a hurdle for borrowers. As long as the new job pays a salary, and isn't based solely or largely on commissions, then an applicant should have little trouble qualifying for a mortgage, as long as that new salary provides a large enough income to support the borrower's new monthly mortgage payments, Shenton said.
Complications can pop up when borrowers are relying on non-salary income, Shenton said. Borrowers who have gone from a salaried job to self-employment will need to show at least two years' worth of tax returns to prove that their new income is stable and not likely to disappear any time soon. If they can't provide these returns, lenders won't consider these self-employment dollars as part of their qualifying income.
Borrowers who switch to a new job in a different field, might give lenders some pause. But most lenders are willing to overlook the job change as long, again, as the new job pays on a salary basis, Shenton said.
"If a borrower is switching a line of work, say the borrower was a scientist and is now a lawyer, then it's case-by-case," Shenton said. "Though typically, so long as it is a salaried position, you are fine to get a mortgage now."
Be careful with bonus or commission income
Kyle Dickmann, president of Denver's Dickmann Taxx Group, says that borrowers need to be cautious about taking on new jobs in which a large portion of their yearly salary will be made up of bonuses or commissions that can rise or fall. Lenders are more nervous about income that isn't as steady as a traditional salary.
"The two-year job history is actually a bit overstated," Dickmann said. "The bigger issue is how much of your paycheck is a fixed amount, like a salary, and how much is commissions or a bonus."
Dickmann knows this. When he was a young attorney, he applied for both a mortgage and car loan without realizing that a large portion of his earnings included bonuses. His lender turned down his application for a mortgage, while his auto lender stuck him with a high interest rate.
The good news? If you can prove that your bonus or commission income is stable, lenders will accept it. This, though, requires time, and time isn't something applicants have when they take on a new commission-heavy job just weeks or months before applying for a mortgage.
Dickmann, for instance, had to wait six months to show the bank that his bonus income was stable, and he had to prove this by showing his lender those six months' worth of paycheck stubs.
"While job history is important, my experience has been that establishing stability in income can easily overcome the two-year job history limitation," Dickmann said.
The numbers that matter more
Lenders are more interested in your three-digit credit score, which shows how well you've paid your bills and handled credit in the past, and your debt-to-income ratio. This ratio measures how much of your gross monthly income is gobbled up by your monthly debt obligations.
Lenders want your total monthly debts, including your estimated new mortgage payment, to equal no more than 43 percent of your gross monthly income. If your ratio is higher than that, you'll struggle to qualify for a loan. Lenders also view three-digit FICO credit scores of 740 or higher to be excellent scores. Scores in the 700 range will generally net lower mortgage rates and easier approvals.
If these two numbers are strong, that two-year job history isn't as important. As long as you have enough income to support your monthly payments, most lenders will overlook the fact that you took a new job three weeks ago.
"The two-year job history is a myth," said Bob Gordon, real estate agent with Berkshire Hathaway in Boulder, Colorado.
Gordon pointed to the two recent college graduates, both with no work history, whom he helped buy homes in the Boulder area. The two buyers hadn't even started the new jobs they accepted, presenting lenders only with a letter of intent from their new employers. The two also had short credit histories, but they were good histories, with no missed or late payments on their records.
The key to persuading lenders to overlook that job switch? You'll need those strong credit scores and debt-to-income ratios.
In reality, all that lenders are concerned about it the ability for the borrowers to make their repayments. Caution is taken with commission or bonus income, but at the end of the day, it's the numbers that count.