It’s a standard rule – you need a 2 years employment history to secure a mortgage. That’s what you think, right? While it’s a good general rule – it’s not set in stone. There are exceptions to the rule and lenders willing to do otherwise. So how do you get around your sketchy employment past? We’ll show you how below.
Stay in the Same Industry
If you look at the true meaning behind the 2-year employment history rule, you’ll learn one thing. You don’t need to be at the same job for 2 years. You need a history of working at least 2 years consistently. This could mean changing jobs during that time. What it doesn’t mean is hopping from industry to industry.
Let’s say you are a teacher now and have been for one school year, so 9 months. You are not going back to the same position next year. Instead, you took a job as a nurse. That’s not the same industry. If you apply for a mortgage after a year or so, you probably won’t secure a mortgage. Now, if you had one teaching job and switched to another the next school year, you might have better luck.
Lenders look for consistency and predictably. They want to know that you’ll succeed in the job you are in. Even if it’s a new job, if you stay in an industry you have experience in, you are more likely to succeed. In the eyes of the lender, this means paying your mortgage on time.
Avoid Gaps in Your Employment History
Gaps in employment are the big red flag lenders don’t like. They don’t want to see you with a job and/or income. Of course, there are exceptions.
- Unemployed for less than 6 months – Many lenders will allow you to secure a mortgage after just 30 days at the new job. Again, sticking within the same industry can help.
- Unemployed for more than 6 months – Most lenders will make you wait until you are at the new job for at least 6 months before applying for a mortgage.
No matter your situation, you’ll need an explanation for your gap in employment. Did you leave or were you let go? Did you fall ill and had to stop working? The lender can use these excuses. No matter your reason, make sure you have plenty of proof to back it up.
For example, if you were hospitalized and unable to work, show the lender your hospital bills or get a note from your doctor. If your company closed, show the lender proof of the date it closed.
You’ll also need to make sure you stay on top of your finances while you don’t have a job. If you default on your loans or other obligations, you’ll damage your credit. You’ll then have an even harder time securing a loan. The less risk you pose to a lender the better.
Figure Out Your 2-Year Average
Lenders often take a 2-year average of your income. If you had the same job for 2 years, it’s an easy calculation. If, however, you changed jobs frequently, it will take a little more work to figure out your average. You’ll have to provide the lender with W-2s from each job you held over those 2 years. The lender then comes up with an average of your income.
If your income varied quite a bit from job to job, this could lower your chances of approval. Let’s say you make $80,000 a year now, but last year you only made 60,000. Your lender will take an average of your income. Instead of using $80,000 for qualification, they’d use $70,000 – the average between the two incomes.
Before you apply for a mortgage, determine your 2-year average. This way you can have a better idea of what you can afford. The lender will then use the average income to determine your maximum debt ratio. You can then figure out what debts you currently have and what it leaves you for a mortgage payment.
If you know your current income is higher or lower than your previous year’s income, adjust accordingly. If there’s a solid reason for the increase, write a Letter of Explanation. Maybe you went back to school or secured some type of training. This could give ample reason for the higher income. Some lenders may grant an exception and use the higher amount for qualifying purposes.
Look Ahead to Raises
If you know you have a raise in your future, consider talking to your lender about it. You’ll have to provide concrete proof of the raise. Your employer can write a letter to the lender stating the details of your raise, including the intended date. Once you start making the higher income, you can provide your lender with a paystub after 30 days. The lender can then use your higher income for qualifying.
Of course, this tactic only works if you have proof of the raise and will receive it soon enough that you can hold out for the mortgage.
Create Compensating Factors to Make up for Your Employment History
Don’t forget about compensating factors. These are things that “make up” for your sketchy employment history. A lender may be able to overlook your employment if you have any of the following:
- Low debt ratio
- High credit score
- Ample assets you can use for reserves
Depending on the level of compensating factors you can provide, you may be able to get a lender on your side. A low debt ratio or high credit score show financial responsibility. This gives the lender reassurance that you’ll be able to make your mortgage payments. Having plenty of assets on hand can also help as it shows the lender that you have a backup plan, should your income stop suddenly.
Your employment history doesn’t have to be a problem when it comes to applying for a mortgage. If you take the time and plan accordingly, you will still have options. Make sure you are open and honest with your lender. Let them know the facts about your employment so that you can start the process off right from the start.