The housing industry standard states you must have 2 years of employment history to qualify for a loan. The good news is this is not a concrete rule. Each lender has their own requirements. Yes, every lender would love to see a 2-year consistent employment history. However, most lenders realize this is not feasible in today’s economy. Under the right circumstances, you may be able to secure a pre-approval with a limited work history.
Conforming Loans are the Toughest
If you want to secure a conforming loan – meaning a loan backed by Fannie Mae or Freddie Mac, you may have a tougher time securing an approval with a limited work history. However, it depends on the circumstances. Here are a few examples:
- You just graduated college and have had a job for 6 months. This is not a very long work history to prove your consistency. However, if your job is within the same industry as your major in college, the lender may be able to use that as a compensating factor allowing you loan approval. If, on the other hand, your job does not coincide with your degree at all, you may not be able to use this exception.
- You just had a baby. Prior to giving birth, you had a full-time job, but you took a year off to be with your baby. Now you are back at work, but it has only been a few months. Normally, the employment gap would prevent loan approval. However, because you have a legitimate reason, you may be able to secure approval with a Letter of Explanation regarding the gap in your work history.
Overall, conforming loans require a consistent 2 years at the same job. There may be exceptions to the rule along the way, though.
Non-Conforming Loans are Less Strict
If you do not have a good explanation for an employment gap or you just started working, you may have a better chance with a non-conforming loan. Fannie Mae and Freddie Mac do not back these loans. This means they do not create the guidelines. Instead, each lender creates their own requirements. Most banks keep non-conforming loans in their own portfolio. They do not sell it to the secondary market, so the only person calling the shots is the lender themselves.
Because of this, non-conforming loans do not always require a 2-year job history. You may pay a higher rate on a loan like this, though. Non-conforming lenders take a higher risk with these types of loans. They make up for the risk with higher fees and interest rates.
Salaried Employment Fares the Best
The type of employment you have also plays a role. Salaried employees have the easiest time with a limited work history. Their income is the most steady. If you work on a salary, your hours are pre-determined, as is the amount of income you receive. If you work less due to illness, you do not lose pay.
Someone who works on an hourly basis, however, has variable income. The amount they work directly affects how much money they make. This is when lenders require a 2-year history. They need to establish a pattern. For example, your hours may fluctuate based on seasons or the time of year. If you work more during a few short months than you do the rest of the year, the lender needs to average your income. If they used the income from the busier time of year it would be inaccurate. They may qualify you for a loan you could not afford. On the other hand, if they used your income during the slower times, you may qualify for more than you receive.
Borrowers who work on commission or for themselves are just as risky. Lenders like to see at least 2 years’ worth of income to see what they make over time. Both types of income fluctuate quite a bit and neither are guaranteed. In order for a lender to find any type of consistency in your income, they require a 2-year average to account for the highs and lows.
Compensating Factors for Limited Work History
Because lenders look at the overall picture when determining a borrower’s ability to secure a loan, compensating factors often help. No lender will approve you for a loan based solely on the fact that you have a 2-year job history. They look at many other factors including your credit score, debt ratio, and amount of assets you have on hand. Putting everything together helps the lender determine how capable you are of repaying the loan.
If you do not have a 2-year job history, it helps if you have other positive factors to pose to the lender, including:
- High credit score – A score higher than 700 signifies great credit and financial responsibility. Along with the score, the lenders like to see a positive credit history going back a few years, not just the last 12 months.
- Low debt ratio – The fewer debts you rack up, the more favorable a lender looks at your file. The less income you have to set aside for monthly debts, the more capable you are of paying your mortgage each month.
- Assets on hand – The more cash you have on hand after you purchase a home, the less risk you pose to the lender. Having 6-12 months of mortgage payments on hand can help you get approved for a loan.
The compensating factors must combine with a positive work history, though. You should not assume after working for a week that you can apply for a loan if you have a great credit score, low debt ratio, and plenty of assets. Everything needs to come together nicely in order to ensure a loan approval.
The key factor is to start planning early. If you know you have a limited work history, work on your other factors to make them as favorable as possible. This way the lender can overlook the risk of a new job and help you secure the mortgage you need.