Most lenders want a 2-year job history from applicants. Does this mean you must be at the same job? It depends on the situation. Below we’ll discuss the different ways lenders look at job changes. Some are acceptable and even encouraged. Others aren’t the best idea. Before you change jobs, learn which may help or hurt your chances of mortgage approval.
The Easiest Job Switch
One type of job switch will help your case – changing jobs in the same industry with better pay. This gives lenders even more reassurance that you can pay your mortgage. Let’s say you are an accountant working at one firm. You find another firm willing to hire you for more money. You’ll do the same exact job. You won’t need a 2-year job history with the new employer. You already have the qualifications and increase your net pay. It’s a win-win situation for the lender.
The Hardest Job Switch
A job switch that could only hurt you is switching from a salaried job to a commissioned job. You take your income from guaranteed to variable. Lenders don’t see this as a good thing. You now have risky income. To make matters worse, you don’t have a 2-year history of this type of income. The lender has no way to tell what your payment habits will be.
In this case, lenders will likely make you wait 2 years before using your commission income. After 2-years of receiving commission income, lenders can take an average of your income. They use 2 years because it accounts for the peaks and valleys of commission. There may be certain times of year that are better for you. It also may take a little time for you to get used to the job. In the beginning, you might not make very much. If the lender used a one-year average, you may not qualify for much of a mortgage. Waiting 2 years gives you the benefit of the doubt.
Contracted Jobs Aren’t Helpful
It’s true that lenders like to see that you’ll have a job for a specific amount of time. A good rule of thumb is 3 years. But, even a contract won’t help you if you take a contracted job. In this case, you are not employed by someone. Instead, you work for yourself. This works much the same way as someone that owns their own company. You’ll need a 2-year history of the employment. Some lenders may allow just 12-months of contract income. The lender will take an average of the income to account for the highs and lows again.
However, a contracted job can hurt you if you aren’t contracted for the long-term. Let’s say you have a 6-month contract. That’s not enough consistency for a lender. What will you do after 6 months? Unless you have a proven history of obtaining another job right away, a lender may be leery about the situation. There’s nothing guaranteeing your income. In a lender’s eyes, this means nothing guaranteeing you’ll pay the mortgage.
Changing Jobs and Industries
Changing industries isn’t always the nail in the coffin of a loan application. It’s acceptable, but only in certain situations. Generally, you must show that you have the knowledge for the new industry. Let’s say you went from an accountant to a history teacher. Those industries are completely unrelated. A lender doesn’t have much reassurance that you’ll succeed at this job. The only way to prove you are qualified is with proper schooling and/or training. In the teacher example, you’d need a teaching degree. This is easy enough to prove. Other industry changes may not be as easy to prove. It’s best to wait until after you secure the mortgage before switching jobs.
Job Hopping Isn’t Recommended
Lateral job changes aren’t always a bad thing. If you change from one job to another 3 months before applying for a loan, all things being equal, you might be okay. When it isn’t okay, though, is when you job hop frequently. Let’s say you change jobs every 6 months. This doesn’t give the lender any reassurance. What happens if you leave one job and can’t find another? You might not be able to pay your mortgage.
It’s best to keep the lateral job changes to a minimum. A couple is okay, especially if you can provide an explanation for the change. Any more than that, though, and a lender may not be willing to take a chance on you.
The Letter of Explanation
No matter the situation, a Letter of Explanation is helpful. This shows the lender in writing what you did. Maybe you changed jobs because you moved or because you didn’t see room for promotion at your previous employer. The lender won’t know these things unless you provide it in writing. This way the lender can process your application accordingly. Just looking at your employment history on paper doesn’t provide explanations. It shows that you change jobs and that’s it. If there’s a good explanation, though, you might be able to secure an approval.
Job hopping isn’t recommended, but it also isn’t the end of the world. You just need to figure out a good balance. Here are a few rules you can follow:
- Don’t change jobs unless it’s absolutely necessary
- Only change jobs if your income stays consistent or increases (a decrease can hurt your application)
- Stay within the same industry unless you can prove you have the qualifications for the new industry
- Document everything and provide it to the lender
Changing jobs can help you in some cases. For example, if you make more money it can decrease your debt to income ratio. This may help your chances of approval. Whether a job change helps you depends on your situation. In the end, it is a case-by-case basis. Before you change jobs, talk to your lender. Determine if it’s a lateral change or more of a drastic one. Drastic changes are best left for after you close on the loan. Of course, you shouldn’t ever change jobs if it will affect your ability to pay the mortgage. A mortgage is likely one of the largest investments of your life; you’ll need to take good care of it.