You’ve probably heard that you have to be at your job for at least two years before you can get a mortgage. While it’s not a lie, there are ways to get around this two-year requirement. Lenders today are more flexible with the employment requirements simply because they know that many people today are changing jobs to better themselves or even start their own business.
Keep reading to learn how your length of employment can affect your mortgage application.
The Two-Year Rule
The two-year rule does still exist. Lenders prefer it if you stay at the same job for this length of time. A two-year history shows lenders dependability and consistency. It’s assumed that after two years, you are pretty comfortable at the job and have shown that you have what it takes to succeed. A two-year history also lets lenders see the consistency in your income. They can look back as long as 12 to 24 months to see if your income is consistent.
Getting Around the Two-Year Requirement
What if you don’t have a two-year history at your job? Are you out of luck in getting a mortgage?
Luckily, you may still get a mortgage, but you’ll need to meet at least one of the following requirements:
- Stay within the same industry as your previous job
- Your new job pays more than the previous job (and is in the same industry)
- Your new position is higher than the previous position, while staying in the same industry
- You underwent training or schooling and changed industries
Lenders look at the big picture. They look to see why you changed jobs and what became of it. For example, if you were a teacher at one school and changed jobs to be a teacher at a different school district but took a pay cut, lenders may not approve you for a loan. Your income isn’t consistent and you changed jobs.
On the other hand, if you were a teacher at one school and took a new job as principal at another school and make more money, you look good to lenders. Even if you made a lateral change – taking another teaching position at the other school but you made the same or higher income, lenders may approve you for a loan.
If you do change jobs, typically you’ll need at least three to six months of history before a lender will use it for qualifying purposes.
What You Need to Know About Changing Industries
If you change industries, you have a few more hoops to jump through to be approved. Lenders need to see something that makes them feel confident that you’ll succeed at the new job. For example, if you went back to school to major in the new industry or you underwent extensive training within the industry, but not at school, it would suffice. Lenders just need to see that you have what it takes to succeed at the new job.
Here’s an example:
Jan is a teacher at a school, but she decided to quit that job and become a real estate agent. Without proof of schooling or training to become a realtor, there’s nothing showing the lender that Jan will succeed as a realtor. She’ll need to wait until she has at least two years of experience as a realtor to use the income on a loan.
Don’t Change Jobs During the Mortgage Process
There’s one word of caution you should follow when thinking of changing jobs. As we said above, you need a three to six-month history at the job for a lender to use it. Under no circumstances should you change jobs when you are in the middle of the mortgage underwriting process.
Lenders verify your employment during underwriting and then again right before the closing. They will know if you change jobs during the process. This would not only send your file right back to underwriting, but it could alsocancel your loan because you won’t have the history that is necessary to qualify for the loan.
Make Sure Your Income Allows the Right Debt Ratio
Your job history is a big part of the mortgage approval process, but you have to make enough money to qualify for the loan too. Each loan program has different deb ratio requirements and is as follows:
- Conventional loans – 28% housing ratio and 36% total debt ratio
- FHA loans – 31% housing ratio and 41% total debt ratio
- VA loans – 41% total debt ratio
- USDA loans – 29% housing ratio and 41% total debt ratio
Your housing ratio is the comparison of the mortgage payment (principal, interest, taxes, and insurance) to your gross monthly income. The total debt ratio is the comparison of your total debts (mortgage, credit cards, car loans, student loans) to your gross monthly income.
Other Qualifications to Get a Mortgage
Lenders look at the big picture, meaning all factors that make up your application. In addition to a stable job history and income, you need decent credit scores (varies by program), enough money to cover the down payment and closing costs, and proof of timely housing payments whether rent or a mortgage.
Lenders put all of the pieces of the puzzle together to determine your ability to get a mortgage. Sometimes a good factor, such as a high credit score, can offset a risky factor, such as a short job history. Lenders call these compensating factors and are the reason that they look at the big picture to see how likely you are to pay your mortgage.
A two-year job history is ideal to get a mortgage, but it’s not the only way. If you have a shorter job history, work on your compensating factors. Also, make sure that you can line up your job change with either your previous job’s industry or proof of your training to succeed in the new job.