There are all kinds of situations that can hurt your mortgage application if you are not careful. One of them is changing lines of work. While it is generally acceptable to change jobs within the same field, jumping into an entirely different line of work can cause problems. In some cases, it may be possible to work around those problems, but other times not. Here’s what to watch for.
What Mortgage Lenders Look for in Your Employment
The employment “ideal” for a mortgage lender is the person who has been working in the same job for at least the last two years and shows a pattern of either stable or increasing income. This gives mortgage underwriters a warm fuzzy feeling that the employment side of your financial picture is safe and secure.
It’s also generally okay to make a job change or two during that two-year period, as long as you are working in the same field, and your income is increasing.
Factors That Can Hurt Your Employment Evaluation
Employment problems can arise under any of the following circumstances:
- You make multiple changes in jobs over the two-year period without any increase in pay (may indicate inability to hold a job)
- The jobs are frequently followed by extended periods of unemployment (income stability issue)
- You’re showing a pattern of declining income (same issue)
- You move into a new career field, or
- You become self-employed
The first three issues relate to employment and income stability. The last two, however, are far more problematic. Either can result in the inability of the underwriter to determine either your employment stability or income reliability. Let’s take a look at each issue individually – employment stability and income reliability – since they’re the root of the problem.
The Job Stability Issue
If you hold two or even three jobs in the same career field over a two-year period, the employment side of your application will generally receive favorable consideration. In fact, a pattern of changing jobs – but not too frequently – accompanied by higher income can be viewed as a positive. Also, stair stepping to a higher income is common in certain fields, and particularly for people very early in their careers.
However, if you have started a new business or entered a completely new line of work, underwriting will be concerned that you have not demonstrated a long enough term in the field to represent stable employment.
Timing is a factor. If you make a career change at least one year before applying for a mortgage, it will be far less of a problem. The lender will be able to recognize some level of stability. But if you changed careers two or three months before applying, the lender may determine that they cannot adequately assess the stability of your employment.
The situation is much worse if the career change moves you into self-employment. Mortgage lenders use the same criteria for the self-employed, which is that they look for a minimum of two years for you to be in business. Though they may sometimes make exceptions if your business is less than two years old (but never less than one year), your entire mortgage application will be less certain.
The Income Reliability Issue
Whenever you change careers or start a new business in the months leading up to your mortgage application, it presents a definite problem for the lender. That problem is that it’s not always possible to adequately assess income reliability from new ventures.
If you make a career change a few weeks or months before applying for a loan, or worse, while you are applying for a loan, the lender will have no reliable way to know that your income will be sufficiently stable to enable you to make the mortgage payments on a long-term basis.
This is a bigger problem when it comes to self-employment. If your business is so new that you have not yet completed an income tax return, the lender will have virtually no way to objectively measure your income.
But even if you move into a salaried position in a new career field, the lender will have no way of knowing if you will be successful in that field. The track record is insufficient for the lender to be able to make a determination as to the continuation of your income.
Far worse is if you have made two or more career changes in the two years before application. For example, you start out as a teacher, then try your hand at car sales, and then move into the insurance industry. The lender may decide that your employment and income situations are entirely unstable.
In such cases, the lender may require that you make the much larger down payment, or they may simply decline the loan outright for lack of both employment and income stability.
The Workaround for Changing Lines of Work
All of that tells you what the problems are relating to changing lines of work. But there may be ways to overcome the obstacles that come with a career change.
Here are some possibilities:
Delay your mortgage application. Right after a career change is not a good time to apply for a mortgage. If you have changed careers, and are paid by salary, you should wait at least one year after the change. But if you have moved into self-employment, you should wait until at least two years have passed.
Provide strong employment documentation. This won’t help if you have started a new business, but it may work if you’re in a salaried position. In addition to the usual employment documentation, such as recent pay stubs and W-2s, get a letter from the new employer affirming your employment stability, as well as an explanation of the specific skills that you bring to the new career. A persuasive letter from the employer can only help.
Make sure you have excellent credit. This point cannot be underestimated. If you already demonstrate employment or income instability as a result of a career change, a fair or poor credit rating will literally be a deal-killer. Your credit should be good or excellent.
Make a large down payment. Much like poor credit, a minimum down payment will only hurt your case. You should plan to put down a minimum of 20%. Also, the funds for the down payment should come from your own savings. Using a gift or a second mortgage probably won’t help.
Have plenty of cash reserves. These are the funds that you will have remaining after purchasing the home. As a general rule, lenders require that you have cash equal to at least two months of the new house payment in reserve after closing. But if you have changed lines of work, you may need considerably more. Showing a full year’s worth of new house payments will go a long way toward helping your case, as neither demonstrates financial strength.
Make sure your new house payment isn’t increasing dramatically. Lenders will typically find it unacceptable if you have entered a new career field, and the new house payment is 50% higher than your current one. That will represent a double risk, and can lead to a decline. Make sure that the new house payment will be increasing by no more than 10%. A stable or declining house payment will be even better.
That’s the 4-1-1 on changing lines of work before applying for a mortgage. Yes, it can be a definite problem. But if you handle it the right way, you can get the mortgage loan approval that you are looking for.