Years ago, the only way you could secure a mortgage is if you held the same job for 2 years. It’s what lenders preferred. It showed stability and reliability. Today, however, that’s not the norm. People change jobs all of the time. Does this mean they can’t secure a mortgage? Luckily, you still can get one. You may have some hoops to jump through though. Here we discuss the importance of steady employment and how you can get around it.
The Golden Rule
Generally speaking, lenders want you to be at the same job for 2 years. It shows the lender you are reliable and consistent. If you hop from job to job, you look unreliable. What if you can’t find another job? How will you pay the mortgage? This is why lenders prefer 2 years. It shows you don’t leave on a whim. It also makes lenders feel as if you will stay with the same employer. With verified income and probably of continued employment, lenders can feel good about lending to you.
Reliability is the Key
What lenders really want to see is reliability. They want to make sure you will have a job not only today, but three years down the road. A mortgage could be with you for the next 30 years. If your job isn’t reliable, the lender may not get paid. Then what happens? This is why they prefer a 2-year work history. It’s not the only way, though. If you can prove reliability other ways, the lender may bend the rules.
Here are a few examples:
- You went back to school and got a degree. The degree is in another industry and you make the switch. 6 months later you apply for a mortgage. If you can show the lender you have the schooling to back up your change, they may consider your job reliable.
- You left your salaried job to open your own company in the same industry. You have 10 years of experience in that industry. Even though your company is new, your experience in the industry gives the lender reassurance of your reliability.
Proving Probability of Continued Employment
A key factor in your work history is your probability of continued employment. Of course, no one can predict the future. Even your employer can’t say whether you will have a job in 3 years. A lot can happen between now and then. Lenders, however, have a way of determining your likelihood of staying employed. They look at the following:
- Your work history – How often have you changed jobs? Do you change industries or stay within the same industry?
- Your qualifications – Are you qualified for the job you have? Did you go to school for the position? Is it a position that will stick around?
- The industry – What is the industry like that you are in? Is it likely to collapse anytime soon? Lenders have a way of predicting what will and will not stay. They use this measurement to gauge your likelihood of continued employment.
If you can’t prove the likelihood of continued employment, you may have a harder time getting a loan. it’s not impossible, though. Lenders look for compensating factors. A few good ones in this situation include:
- High down payment – The lower your loan-to-value ratio, the more likely it is you’ll be approved.
- Mortgage reserves on hand – The more cash you have on hand, the better. This shows lenders you can pay your mortgage even if your income stopped.
Of course, these factors don’t guarantee loan approval. They can help your chances of approval, though.
Dealing With Employment Gaps
Gaps in your work history can cause a problem. It doesn’t mean you won’t get a loan. But expect lenders to ask questions. They must know why you were unemployed. Did you lose your job? Did you take time off for personal reasons? No matter the case, write a Letter of Explanation for the lender. Provide as much detail as you can in the letter. You should also provide any supporting documentation that coincides with what you state.
Generally, lenders require you to be back at work for at least 6 months before you apply for a loan. This lets them see what you actually make. Just taking a few weeks of your income isn’t enough. Lenders need to see the income continue. They may also take an average of the income over the 6-month or longer period.
Keep in mind, though, you should be able to prove a 2-year work history prior to the employment gap. Let’s say that you had a baby and took a year off work. Before you took that time off, if you held a job for at least 2 years, it will suffice. Once you are back at work for 6 months, you can show the lender that you are back at it. Again, you’ll need a Letter of Explanation helping you describe the situation.
Steady employment doesn’t always mean staying at one job for the rest of your life. You have options. You can change jobs and still get a mortgage. It depends on the reasons you change jobs, though. If you change just for the sake of it, you might have a harder time qualifying. If, on the other hand, you have good reason, such as a raise or better opportunity, you may not have as hard of a time qualifying.
You shouldn’t focus solely on your work history when determining your likelihood for mortgage approval. You should look at all aspects of your file. For example, your credit score, debt ratio, and loan-to-value ratio matter. The lender evaluates these factors as much as your employment history. They then put all of the pieces of the puzzle together. This helps them determine your risk level for your loan. The more positive factors you can provide, the better your chances of approval.