For most people, changing employers will not impact the ability to qualify for a mortgage loan, especially if you are going to be earning more money. For some homebuyers, however, the effects of changing jobs can spell disaster when it comes to your loan application. Make sure you discuss in great detail with your lender and know ahead of time what implications any change in your employment that might occur during your home buying experience and what its impact could be. Always be armed with the best knowledge and you will stay on the right track.
A word about traditional, salaried employees:
If you are a salaried employee who doesn’t earn additional income from commissions, bonuses, or from working any over-time hours, switching employers should not create a problem. Just make certain to remain in the same line of work. Hopefully, you will be earning a higher salary, which will help you better qualify for your mortgage anyhow!
A word about standard, hourly employees:
If your income is based on hourly wages and you work a straight 40 hour shift each week, without over-time, changing jobs (for the same wage or higher) should not present any trouble for you. Length of employment does come into play for some lenders. They love to see stability and not job hopping. Stay tight with your lender and disclose everything to them, let them help guide you in the right direction and hide nothing from them. It will only cause you problems down the road if you do.
A word about non-traditional, commissioned employees:
This scenario is when an individual has a substantial portion of their income stemming from commission paychecks. Lenders typically average your commissions over the last two years, and you should never play around with how lenders calculate your income. Changing employers while trying to keep a loan application together is not a good idea. It will create uncertainty about your future earnings from commissions. (There would be no track record from which to procure an average income.) Even if you are selling the same type of product, with essentially the same commission structure, the underwriter will not be certain that your past earnings will accurately predict future earnings. Changing jobs would greatly impact your ability to secure a home in a negative way.
A note about bonuses – will they help or hurt?
If a substantial portion of your income at your new employer will be generating from bonuses, you may want to discuss this in great detail with your lender before moving ahead. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for a minimum of two years and have a good track record of receiving those bonuses. They, the lender, will average your bonuses over the last two years in an effort to realistically calculate your earned income.
Changing employers means that you do not have the required two-year track record necessary to count bonuses as income. Ouch.
A word about part-time employees:
If you earn an hourly income but rarely work a 40 hour work week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job. Therefore, there’s no real way to determine your income. If you stay at your current job, the lender can simply average your earnings and come up with a figure. If you have a choice in the matter, stay where you are during the home buying process and after you are closed and moved in, redirect your efforts into finding a new and better job that you love.
Be careful to make sure you align the rate of pay with what you previously had so you don’t fall behind on any payments or get yourself into a situation where you’re paying penalties and sliding backwards or falling behind. It sounds very obvious to say that but you’d be surprised at how many people still overlook this fact.
Earning over-time income can help:
Since all employers award over-time hours differently, your overtime income can be determined, but be very careful about switching employers. If you remain at your current job, most likely, if there is a good track record established, your lender will give you credit for the over-time income. They determine your over-time earnings over the last two years, and then calculate a monthly average. That’s great news! Keep working hard!
A word about self-employment:
If you are considering trading in your steady job for one of self-employment before buying a new home, don’t do it. Make your purchase first.
Lenders like to see a two-year track record of self-employment income when approving a loan. In addition, self-employed individuals tend to include many expenses on their Schedule C of their tax returns. This is especially true in the early years of the self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income potential to qualify for a home loan.
If your income is very high, well above average, and the loan amount you are seeking is considerably “low” your lender will consider this fact as well. It would be a similar situation to buying a home for cash, but not quite.
It’s very important to note that if you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay the process regarding your purchase for the same reasons as stated above.
When transitioning from being a W-2 employee over to a 1099 employee, it’s considered that same ‘ol situation when considering commission and bonuses. Meaning, that the lenders need to have a two year history to average a 1099 income. They can use one year instead of two, but you have to still prove that you’ve been self-employed for at least two years previous to the switch. The bottom line is that is you are going to be switching anything regarding how you generate income during a home loan process, get all the details up front from your lender to make sure you can still keep wind in your sails.