Navigating Employment Changes During Your Home Loan Application
Changing employers usually won’t affect your ability to qualify for a mortgage, especially if you’re earning more money. However, for some homebuyers, switching jobs can complicate your loan application. It’s crucial to discuss any potential job changes with your lender in detail to understand their implications. With the proper knowledge, you can stay on track.
For Traditional Salaried Employees:
If you’re a salaried employee without additional income from commissions, bonuses, or overtime, changing employers shouldn’t be a problem. Just ensure you stay in the same field of work. A higher salary can even improve your mortgage qualifications.
For Standard Hourly Employees:
If you earn a steady hourly wage for a consistent 40-hour workweek, switching jobs (for the same or higher wage) typically won’t be an issue. However, lenders prefer stability, so avoid frequent job changes. Stay in close contact with your lender, disclose all details, and let them guide you.
For Commissioned Employees:
Lenders will average your commissions over the past two years if a significant portion of your income comes from commissions. Changing jobs during your loan application can create uncertainty about your future earnings, which is problematic. Even with a similar commission structure, underwriters need a reliable track record to predict future earnings. Avoid job changes in this scenario.
Regarding Bonuses:
Discuss this with your lender if your new job heavily relies on bonuses. Lenders rarely consider future bonuses unless you’ve been with the same employer for at least two years and have a consistent bonus history. Changing jobs means you won’t have the necessary track record to count bonuses as income.
For Part-Time Employees:
Don’t change jobs if you work part-time and rarely hit 40 hours a week. It’s difficult to predict your income with a new job. Lenders can average your earnings from your current job to determine a reliable income figure. Stay put during the home-buying process and look for a new job after closing.
Earning Overtime Income:
Overtime pay varies by employer, but if you have a strong overtime history at your current job, your lender will likely credit it. They will average your overtime earnings over the last two years to calculate a monthly average. Switching jobs could disrupt this favorable calculation.
For Self-Employed Individuals:
If you’re considering self-employment before buying a home, wait until after your purchase. Lenders prefer a two-year track record of self-employment income. Additionally, self-employed individuals often reduce taxable income through expenses, which can hurt your mortgage qualifications.
If you plan to switch from a sole proprietorship to a partnership or corporation, delay it until after your home purchase. Similarly, transitioning from W-2 employment to 1099 status requires a two-year history for lenders to average your income. Ensure you understand all the details from your lender before making any income changes during your loan process.
By discussing your situation with your lender and understanding these guidelines, you can navigate the home-buying process smoothly while making informed decisions about your employment.
For most people, changing employers will not impact the ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can spell disaster when it comes to your loan application. Make sure you discuss in great detail with your lender and know ahead of time what implications any change in your employment that might occur during your home-buying experience and what its impact could be. Always be armed with the best knowledge and you will stay on the right track.
A word about traditional, salaried employees:
If you are a salaried employee who doesn’t earn additional income from commissions, bonuses, or from working any overtime hours, switching employers should not create a problem. Just make sure to remain in the same line of work. Hopefully, you will earn a higher salary, which will help you better qualify for your mortgage!
A word about standard hourly employees:
If your income is based on hourly wages and you work a straight 40-hour shift each week, without overtime, changing jobs (for the same wage or higher) should not present any trouble for you. Length of employment does come into play for some lenders. They love to see stability and not job hopping. Stay tight with your lender and disclose everything to them, let them help guide you in the right direction and hide nothing from them. It will only cause you problems down the road if you do.
A word about non-traditional, commissioned employees:
This scenario is when an individual has a substantial portion of their income from commission paychecks. Lenders typically average your commissions over the last two years, and you should never play around with how lenders calculate your income. Changing employers while trying to keep a loan application together is not a good idea. It will create uncertainty about your future earnings from commissions. (There would be no track record from which to procure an average income.) Even if you are selling the same type of product with essentially the same commission structure, the underwriter will not be sure that your past earnings will accurately predict future earnings. Changing jobs would significantly impact your ability to secure a home negatively.
A note about bonuses – will they help or hurt?
If a substantial portion of your income at your new employer will be generated from bonuses, you may want to discuss this in great detail with your lender before moving ahead. Mortgage lenders rarely consider future bonuses as income unless you have been on the same job for at least two years and have a good track record of receiving those bonuses. They, the lender, will average your bonuses over the last two years to realistically calculate your earned income.
Changing employers means you do not have the two-year track record necessary to count bonuses as income. Ouch.
A word about part-time employees:
You should not change jobs if you are considering buying a home or are in the process of buying a house if you earn an hourly income but rarely work a 40-hour work week. There would be no way to tell how many hours you will work each week on the new job. Therefore, there’s no real way to determine your income. The lender can average your earnings and develop a figure if you stay at your current job. If you have a choice in the matter, stay where you are during the home buying process and after you are closed and moved in, redirect your efforts into finding a new and better job that you love.
Be careful to match up the pay rate with what you previously had so you don’t fall behind on any payments or get into a situation where you’re paying penalties and sliding backward. You’d be surprised at how many people still overlook this fact.
Earning over-time income can help:
Since all employers award overtime hours differently, your overtime income can be determined, but be very careful about switching employers. If you remain at your current job, most likely, if there is a good track record established, your lender will give you credit for the overtime income. They determine your over-time earnings over the last two years and then calculate a monthly average. That’s great news! Keep working hard!
A word about self-employment:
If you are considering trading in your steady job for self-employment before buying a new home, don’t do it. Make your purchase first.
Lenders like to see a two-year track record of self-employment income when approving a loan. In addition, self-employed individuals tend to include many expenses on their Schedule C of their tax returns. This is especially true in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income potential to qualify for a home loan.
If your income is very high, well above average, and the loan amount you seek is considerably “low,” your lender will also consider this. It would be similar to buying a home for cash, but not quite.
It’s very important to note that if you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay the purchasing process for the same reasons stated above.
Transitioning from a W-2 employee to a 1099 employee is considered the same when considering commission and bonuses. Lenders must have a two-year history to average a 1099 income. They can use one year instead of two, but you must prove that you’ve been self-employed for at least two years before the switch. The bottom line is that if you are switching anything regarding how you generate income during a home loan process, get all the details upfront from your lender to ensure you can still keep the wind in your sails.
