You’ve probably heard that you need 2 years of employment at the same job in order to get a mortgage. While this would be nice, it’s not always required. Lenders look at the big picture when deciding if you are a good candidate for a mortgage. It is possible to have less than 2 years at the same job and still get a mortgage.
You need to show that you have the ability to repay the loan, but lenders measure this with a variety of factors, not just your employment history.
Lenders Want Stability
Lenders want to know that you are stable in your industry – not necessarily at the same job. They recognize that job changes need to happen whether to make more money or to obtain a better opportunity. They look at your history overall and look for predictability and reliability. Just what does that mean?
If you make lateral moves in your industry, in other words, you do the same job but for two different companies, lenders usually don’t mind this. Let’s say you were a teacher at one school, but then changed schools last year. That’s a lateral move – you have the same job, just the location is different. As long as you don’t have a history of changing jobs every year, lenders will accept this as stability.
If you make a wild move, such as quitting your job as a teacher and becoming a computer programmer, now that’s not a lateral move. There’s no predictability or proof that you’ll succeed in your new job. With this type of move, the lender would likely require a 2-year history.
Of course, there are exceptions to the rule. Let’s look at the teacher that became a computer programmer. Let’s say that teacher took classes at night in order to become a computer programmer. There’s some level of stability – they can prove that they have what it takes to succeed at the job. That’s different from making a radical move without any history or training behind it.
Lenders Want Predictability
Underwriters need to confirm that you have the ability to pay your mortgage. In other words, they need predictability that your income is stable and able to cover the mortgage payment plus your other debts. Don’t forget, you also need money left over to cover the daily cost of living and for savings.
If your income changed drastically over the last two years, it won’t show predictability. A lender can’t look at an unstable history and determine that you are able to afford the loan. This doesn’t mean you have to be at the same job during that time. It doesn’t even mean you must have had a job over the last two years. If you went to school or had some other type of training, that could explain the lack of income during that time. The training/school helped you earn the income you are earning today. Typically, you’ll need at least a six-month history of the new income level in order to qualify, though.
Dealing With Gaps in Employment
If you have a gap in your employment, the rules may be a little stricter for you. First, you’ll need to explain the gap with a Letter of Explanation. Make sure your explanation is a worthy one, such as you underwent training or you left to be with a sick parent. Simply stating that you didn’t like your previous job and quit won’t suffice. Remember, lenders want predictability and stability. If you have a history of leaving jobs, it won’t make the lender feel as if you can comfortably afford the mortgage.
Along with the Letter of Explanation, you’ll need six months of gainful employment. Lenders need to make sure that you are secure in your new job and that your income is consistent. Allow anything less than six months at your job would leave a bit of unpredictability that lenders are supposed to avoid.
Providing Compensating Factors
Remember when we said lenders look at the ‘big picture.’ This is where compensating factors come into play. If you have less than a 2-year job history, you should make other areas of your loan application shine. A few examples include:
- High credit score – Rather than showing the minimum credit score required for the program, present the lender with an excellent credit score (over 700). This will help the lender see that you are financially responsible and are likely to be able to handle the mortgage debt.
- Large down payment – Again, rather than meeting the minimum down payment requirements of a program, put more money down on it. The more money you have invested in the home, the more likely you are to make your mortgage payments because you stand to lose your investment.
- Low debt ratio – The fewer debts you have going into a mortgage, the more money you’ll have available to pay your mortgage, which helps a lender approve your loan application.
While a 2-year employment history is ideal, it’s not required if you can provide other factors that make up for the lack of employment history. Lenders look at all factors to come up with the ‘story’ that you paint that will determine if you are likely to pay your mortgage back or not.