Buyer Boot Camp #2: The Two-Year Rule, Keep Your Job
If you started a new job today, one with higher pay and great end of quarter bonuses, congratulations! But, it will be two-years until you can qualify for a mortgage with that new job. Just like you learned in Buyer Boot Camp #1, it’s not enough to tell lenders you can afford a home loan, you have to prove it to them.
Due to the recent housing crisis, the requirements for securing a mortgage have tightened significantly. Lenders want to see borrowers in the same job for at least the last two-years, and that goes for part-time workers, contract workers and the self-employed. Twenty-four months at the same job making the same stabile income without any breaks, or changes is best. Lenders will not make any assumptions in regards to earning reliability in a new job compared to the old one. So, no matter how much you may want to leave your job and never go back, if buying a house is a priority, stay put until the keys to your new home are in your hands.
If you’re self-employed, or working as a contract worker, you will have to jump through some extra hoops to qualify for a home loan. If you had a high paying corporate job for ten years and last year you went into business for yourself you’ll find it nearly impossible to qualify for a home loan. Even if you have a terrific credit score, because you haven’t been self-employed for two years or more you’ll likely have trouble securing a loan. The other tricky thing that the self-employed need to be aware of is that unlike the salaried employee, your mortgage amount will be calculated from your net income and not your gross income. This means that while it’s nice to have a low net income for tax purposes, a low net income won’t qualify you for a home loan. Basically, you need to decide which is more important to you: qualifying for a larger loan, or paying less on your taxes. Rather than deducting your expenses, consider depreciating some of your purchases. You may also be able to amend your previous year’s tax return to bring up your net income, but keep in mind that this will equal a higher tax payment.
If you’re working one or many part-time jobs, the two-year rule applies to you as well, maybe even more so. This is because unlike the salaried employee, your pay is based on an hourly rate and an average pattern of hours that you work. If you change a job, a lender will not be able to forecast income without seeing a new and established pattern of work hours.
No matter what your work situation has been like over the last two years, lenders will need to see the past two-years’ tax returns, bank statements, as well as proof of any debts or assets you own. If you’re anything but a salaried employee expect to also show paper trails/invoices for any checks received that are over $400, and provide gift letters for any money your family or friends might be helping you out with. Applying for a mortgage can feel like a job in itself, but the process will be a lot easier if you haven’t made any job changes in the last two years. Resist the urge to make a change until you are comfortably living in your new home.