First-time home buyer: employment challenges
The first-time home buyer often faces challenges that don’t affect experienced home buyers.
For example, first-time buyers tend to have less money saved for a home down payment. They often carry a collection of student loans and other debt, which makes budgeting for a household difficult.
They also face hurdles with their employment history (or, lack of).
First-time home buyers tend to skew younger than the general home-buying demographic with many first-time buyers are just getting started in their careers.
The only thing to fear is fear itself
Securing home loan approval when you’re new to a job can be nerve-wracking. Despite this fear, first-time home buyers account for one in three homes sold nationwide.
Here are two reasons why:
Buyers fear they can’t get approved.
Employment is not just your job history
The reality, though, is that you don’t always need years and years of work experience in order to get home loan-approved — you can get approved on just the strength of a job offer.
This post discusses employment; and, is the next in a series meant to help first-time home buyers buy their first home.
How much work history do you need to buy a home?
When you apply for a mortgage, the lender wants to know that you can and will repay your loan. Your credit rating represents your willingness to repay. Your income represents to ability to repay.
This is why employment plays such a large role in the mortgage application process.
Underwriters check out the jobs you’ve had in the past, the job(s) you hold today, and the job you may hold in the future. They want to make sure you have a plan for your career — and that your plan is working.
Remember that, in general, a first-time home buyer lacks the employment depth of an experienced home buyer. A first-time home buyer may be fresh out of college or graduate school; or may be just a year or two into its career.
The two year rule
It’s typical for lenders to consider your last two years of employment. That does not mean you must have been conventionally-employed employed during those last two years.
There are the no-brainer work histories.
For example, if you were a staff accountant in the software industry and changed jobs to be a staff accountant in the medical field, that would considered an acceptable lateral move by a lender.
Then, there are the unconventional but acceptable histories.
Suppose that you spent the last four years completing an accounting degree, and worked a couple of temporary accounting jobs during the summer. Upon graduation, you got a full-time accounting position.
The fact that you’d only been working full-time for year probably won’t hurt your mortgage approval chances.
However, ten-year history won’t help if you spent a year as an accountant, switched to bar-tending for a couple of years, and then started up a multi-level marketing gig.
Now, you’re a personal trainer with six months in the business, and that’s just not a reliable track record.
In general, your lender just wants to make sure that your household income is stable, and will be ongoing for period of at least three years.
They’re also concerned with your income.
How long must you be on the job to qualify for a mortgage?
As with many things in mortgage lending, the answer is “it depends.”
For instance, you may have different requirements if you get a conventional loan as opposed to an FHA loan.
In fact, your work history might make you decide to change loan types. For instance, getting an FHA loan with less than two years employment is easier than qualifying for another loan type.
Following is a breakdown of what each loan type requires.
Conforming loans with less than two years employment
Two years of employment history is recommended, according to Fannie Mae, the lead conforming loan rule-making agency. (Freddie Mac, the other mortgage rule-setter, has very similar rules.)
However, it also says that less than two years is acceptable, provided the applicant’s profile demonstrates “positive factors” to compensate for shorter income history.
What are these factors? Education is a great one. For instance, you have a four-year degree in the field in which you now work. That education almost always counts as work history. New grads typically have no problems qualifying despite a brand new job.
If you recently changed jobs and changed fields, try to tie them together with a great letter of explanation. Present a case why this new job is just a continuation of your previous one. What skills did you build there that you now are using?
Keep in mind that the above only applies to salaried, full-time work. Bonuses, overtime, or variable pay likely needs to have a two-year history to be “counted” toward qualification.
FHA loans with less than two years of employment
FHA is more lenient about work history. Its guidelines state that previous history in the current position is not required. However, the lender must document two years of previous employment, schooling, or military service, and explain any gaps.
If an extended gap is present, the applicant must be employed in the current job for six months, plus verify a two-year work history prior to the gap.
The FHA lender examines the probability of continued employment. That means verifying past work or education history.
FHA lenders want to see that you are qualified for your current position, and that you are likely to remain in that position or a better one in the future.
Don’t worry if you have changed jobs frequently in the past two years. This is acceptable as long as each job change was an advance in your career.
Write a letter explaining how each move benefitted your situation — more money, more responsibilities, a company with more opportunity.
As with other loan types, FHA requires two years of documented history of overtime, bonus, and other variable income.
VA loan employment history requirements
VA loans allow you to qualify with less than two years of employment. The lender document your work history and requests proof of relevant schooling or military service.
These loans are tougher if you have less than 12 months of employment total (including all jobs). The VA lender may request the probability of continued employment from your current employer.
Additionally, lenders examine past training or relevant experience. The VA requires that the lender prove that an applicant has the needed skills for the current job.
For active military service, VA lenders consider income stable if the applicant is further than 12 months from his or her release date.
USDA loan qualification with less than two years of employment
USDA mortgages offer many benefits, such as zero down payment requirement and credit score flexibility. And they are also very lenient about employment history.
According to guidelines, there is no minimum length of time applicants must work in their current position before applying for the mortgage.
The applicant must document work history for the previous two years. It’s okay if he or she has moved around between jobs. However, the applicant must explain any significant gaps or changes.
If you are a USDA applicant, you must document that you were working toward or obtained a degree via college transcripts. Or prove your military service with discharge papers.
Both of these factors help satisfy your work history requirement.
While you can qualify for a USDA loan with a new job, you must prove that your current position is stable, so that you can make your mortgage payment long-term.
How much income do you need to get a mortgage approved?
To get mortgage-approved as a first-time home buyer, it’s not just your job that matters — your income matters, too.
However, because of how mortgage lenders calculate income, first-time home buyers can be at a disadvantage.
This is because first-time home buyers don’t often have the work history that an experienced buyer possesses. As a result, not all income may be counted as “qualifying” income.
Check out the common scenarios below. If you have questions about how your particular income would fit into the loan approval process, be sure to ask your lender.
When you earn an annual salary
When your income is an annual salary, your lender divides your annual gross (before tax) income by 12 months to determine your monthly income.
In general, you do not need to show a two-year history — especially for jobs which require specific training or background.
When you earn an annual salary, plus a bonus
When your bring home an annual salary plus a bonus, your lender calculates your income in two parts.
First, your lender divides your gross annual income by 12 months to determine your monthly income.
If you have received bonus income for at least two years, and the employer indicates that bonus income will continue, lenders can consider it “qualifying” income.
Underwriters normally divide your last two years of bonus income by 24 months to arrive at a monthly total.
However, as with any income, if lenders see that it has been dropping year-over-year, they may choose to discount or even ignore this income.
When you earn an hourly income
Typically, lenders multiply your hourly rate by the average hours your work. (See the table below, which shows Fannie Mae income calculation guidelines)
Erratic work hours or recent job changes ca harm your income calculation.
Those with little work experience, who also earn hourly wages can experience difficulty when applying for their first mortgage.
When you earn overtime pay
When you earn wages plus overtime pay, your lender totals your prior two years of overtime pay, and divides by 24. That’s your qualifying overtime pay.
Again, if the extra pay declines over time, the lender may discount it. And without a two-year history of overtime pay, your lender may not allow you to claim it on your mortgage application.
When you earn commission income (more than 25 percent)
When you earn more than 25 percent of your income from commissions, your base income the monthly average of your last 24 months of income.
If you have less than 24 months of commissioned income, your lender probably can’t use it for qualifying.
There are exceptions — for instance, if you worked for the same company, doing the same job, and earning the same or better income, a change in your pay structure from salary to fully or partially commissioned might not hurt you.
You have to make the argument, however, and get your employer to confirm this.
When you are self-employed
When you are self-employed, mortgage lenders will require at least two years of verified income. They then use a complicated form to determine your “qualifying” income.
Lenders have been known to make exception on this rule — specifically, for recently self-employed persons who have started a business in a “related field.”
It’s not uncommon today for employees to continue working for the same company, switching to “consultant” status,which is self-employment, but getting the same or more income. These applicants can probably skirt the two-year rule.
What are today’s mortgage rates?
When you’re buying a home for the first time, you may not have the work experience of a seasoned borrower, but that doesn’t have to affect your ability to get mortgage loan approved.
Get today’s live mortgage rates now. You don’t need to provide your social security number to get started, and all quotes come with access to your live mortgage credit scores.Verify your home buying eligibility (Aug 21st, 2018)