Elizabeth Root, a licensed Mortgage Expert at Better Mortgage, explains how lenders consider your employment income.
Are you financially ready to buy a house? To answer that question, you may be thinking of how much money you’ve saved up for a down payment. However, you should also take into account how much money you’re actually making. Lenders consider both your assets and your income to help determine whether or not you qualify for a mortgage. Your monthly income, in particular, gives lenders an understanding of how big of a monthly mortgage payment you can afford without financial difficulty.
Loan-eligible monthly income can include things like alimony, child support payments, investment returns, retirement benefits, and disability payments. However, for most of our customers, the money they earn at work makes up the bulk of their loan-eligible income. This post will give you a Better Mortgage look at how your employment income impacts your mortgage process.
How we consider employment income
In order to verify your employment income, we’ll usually need:
- 1 month of paycheck stubs
- W-2 forms from the last two years, if you collect a paycheck
- 1099 forms from the last two years, if you are self-employed
- Federal tax returns (Form 1040) from the last two years
- A verification of employment (VOE)
Using these documents, we’ll be looking to see if your employment income has been stable and consistent over a 2-year period and likely to continue into the future. As long as your current job is not considered a temporary position and doesn’t have a termination date, we’ll consider your employment to be permanent and ongoing. Regardless of exactly how you get paid and how often, we will annualize your income to smooth out any highs and lows. That annual income will then be divided by 12 to get your monthly income.
Types of pay structures
Your job’s pay structure also affects how lenders look at your employment income. Base W-2 income is seen as stable (i.e. it’s the minimum your employer has pledged to give you). On the other hand, less predictable types of income such as commissions, bonuses, overtime pay, self-employment, RSU income, or part-time/seasonal employment are seen as less stable.
Because it’s more difficult for lenders to determine the likelihood of variable income continuing consistently, lenders may need to take a more conservative approach when they predict your future income. For example, if you haven’t received this variable income for at least two years (like if you’ve had a side-gig for a few months), it might not be loan-eligible. Or, if your variable employment income has changed year over year, lenders may need to use the average of the two years if your income has increased, or the current amount if your income has decreased. If you’re self-employed, this article can help you better understand how your income is considered in the mortgage process.
Recent job changes
Have you changed jobs in the last two years? If you don’t have a solid 2-year history at your current job, your lender may ask for additional documentation, such as an explanation for why you changed jobs, an employment contract that states your compensation, and/or a letter verifying your position from your employer.
So long as you are able to provide the necessary paperwork, most job changes won’t adversely affect your mortgage application. In particular, if you’re salaried and moving up within your industry or if you have a history of employment with a similar pay structure in the same industry, you shouldn’t come across any issues in this respect.
Switching jobs can get tricky if it involves a change in your pay structure or less predictable sources of income. Since employers award commission, overtime, and bonuses differently, it’s more difficult for lenders to assess these types of income at a new job without 2 years of history. The same can go for part-time employment—since we can’t necessarily predict how many hours you will work each week on the new job, it’s harder for us to accurately calculate your overall income. Like I mentioned above, all this means is that we may ask for additional documentation or need to take a more conservative approach in calculating your income.
Did you know? Signing bonuses are not considered loan-eligible income, but they can be used towards your down payment or closing costs.
Job changes during your loan
If you’re considering switching jobs, you should avoid doing so if you’re already in the midst of getting a loan. Changing jobs during the mortgage process can make it longer and more difficult since your lender will have to re-underwrite your loan to take into account your new employment information. You’ll also have to provide additional documentation to verify your new position and salary, as I just mentioned, which can delay things even further. In some cases, your ability to secure financing may even be jeopardized.
Tip: If you expect to be changing jobs in the near future, you may want to consider handling that first and then beginning the mortgage application process or vice versa, depending on if/how your new job affects your employment income.
If a job change during your loan process is inevitable, make sure to tell us sooner rather than later. That way, we can work together to get all of the required documentation and make things go as smoothly as possible. Like most lenders, we will re-verify your employment status right before finalizing your mortgage, so keeping us in the loop is the best way to ensure that there are no last-minute surprises.
In general, an employment record with a lot of job changes isn’t a big concern to our underwriters unless there are large gaps of unemployment in between. Because of mortgage industry requirements, we’ll need an explanation for any gaps that are longer than 30 days, whether it’s due to maternity/paternity leave, short-term disability, downtime between jobs, etc.
Exactly how these gaps are evaluated depends on the specifics of your situation, but we’ll usually look to see if your employment status and salary when you returned to work is stable and likely to continue. In general, lenders need to make sure that your employment income is steady so that you can comfortably afford your mortgage payments into the future.
So, what does this all mean for your mortgage?
Having variable income, employment gaps, or recent job changes doesn’t necessarily mean you won’t be able to qualify for a mortgage loan. It does mean you may need to provide additional documentation and that lenders may need to take a more conservative approach when calculating your overall income.
At Better Mortgage, we recognize that not everyone fits into the traditional employment mold. We’re committed to helping our customers understand how their unique employment situation is considered in their mortgage application, so they can approach the process with confidence. To learn more about how your job may affect your mortgage, schedule a call with one of our non-commissioned Loan Consultants.