Mortgage lenders want to know two things about your income — is it enough to pay your prospective mortgage and your other bills, and is it stable — expected to continue for at least three years. Underwriters work through the six factors below to see if your income qualifies you for a mortgage.
1. How are you paid? If your income is 100 percent salary, it’s easy for an underwriter to calculate and predict your cash flow in the future. However, if a significant part of your earnings come from bonuses or commissions, you’ll usually have to show a two-year history of this kind of income for it to be counted in your debt-to-income ratios. If at least 25 percent of your income is commission or bonus pay, you are practically self-employed as far as underwriters are concerned — and like business owners, you’ll need at least a two-year history of this compensation to get credit for it. You don’t have to have been at the same firm but you do have to have worked in the same capacity, and in the same industry.
2. How long have you worked in that field?
Your history with a specific company is less important than your experience in the field. If you have been a CPA for decades, it doesn’t really matter that you are now at Alpha Company instead of Beta Industries. Normally, a two-year history is required. Keep in mind that other kinds of experience in the field — volunteering, temp work, internships and classes — may count if the rest of your application is strong.
3. How is your employment contract structured?
If you have a contract for a job that you have not yet started, you may still qualify for a mortgage. Ideally, your employment history should show several years of experience in the same field with increasing income and responsibility. If the contract is open-ended or for several years, that’s good. You don’t want one that says you have a six month assignment. One successful applicant in Reno, Nevada, for example, was a new college football coach with a guaranteed 5-year contract and a ten-year history of coaching college-level sports.
4. What are your prospects?
What if you’re a recent college grad and working your first job? That may not be a problem if you are in the right field and with the right credentials — for example, a med school grad with a hospital job or a new lawyer working for the state government. Underwriters will want to see stability, and at least one year of continuous employment in your field before approving your home loan.
5. How’s your history?
People with new jobs who also have multiple job changes with no advancement have a much harder time getting approved for mortgages than those who have remained at the same level or advanced in their chosen careers. And these days, those in unstable industries will have challenges too. Underwriters don’t just look at your income today; they have to determine how likely you are to remain in your job.
6. What are your compensating factors? These are items that help overcome a recent job change — for example, excellent credit, assets (enough to pay your bills for several months if you were to lose your job), and a solid debt-to-income ratio.
On the other hand, if your employment history is blemished, you have barely enough saved for a down payment, your credit is mediocre, and your income barely enough to qualify, your recent job change will be more of an issue. Here is what FHA’s underwriting guidelines have to say about income stability:
“We do not impose a minimum length of time a borrower must have held a position of employment to be eligible. However, the lender must verify the borrower’s employment for the most recent two full years. If a borrower indicates he or she was in school or in the military during any of this time, the borrower must provide evidence supporting this claim, such as college transcripts or discharge papers. The borrower also must explain any gaps in employment spanning one month or more. Allowances for seasonal employment, such as is typical in the building trades, etc., may be made if documented by the lender.
To analyze and document the probability of continued employment, lenders must examine the borrower’s past employment record, qualifications for the position, previous training and education, and the employer’s confirmation of continued employment. A borrower who changes jobs frequently within the same line of work, but continues to advance in income or benefits, should be considered favorably. In this analysis, income stability takes precedence over job stability.“