Meeting Home Loan Employment Requirements When Your Situation Changes

Getting a home loan can be exciting but also stressful, especially when your employment situation doesn’t fit the standard mold that most lenders look for. Lenders generally want to see strong, stable employment history when considering applicants for home loans. However, life happens and peoples’ situations change. If your employment status doesn’t check all the typical boxes, don’t panic. Here are some tips for meeting home loan employment requirements even if you’ve recently changed jobs, are self-employed, or have unique circumstances.

Why Lenders Care About Your Employment

Let’s start by understanding why lenders care so much about borrowers’ employment and income.

Lenders want reassurance that borrowers have the means to repay the loan. Past and present employment helps give them that confidence. Specifically, lenders look for:

• Steady income – Regular earnings from ongoing employment provides proof of income to make monthly payments Lenders usually like to see at least 2 years of employment history.

• Job stability – Little job hopping suggests you’re reliable and aren’t at high risk of losing your income source.

• Similar field or industry – Staying in the same line of work shows expertise in your profession.

• Sufficient income – Your earnings need to be enough to cover the mortgage payment and other debts and living expenses.

While lenders prefer to see long-term, salaried employment, they recognize that everyone’s circumstances are different. Don’t assume you won’t qualify if your situation deviates from the norm.

Options If You’ve Recently Switched Jobs

Switching jobs right before applying for a mortgage can make lenders nervous. But it doesn’t automatically disqualify you.

Here are some tips if you’ve recently started a new job:

• Explain the reason for the change. Was it a promotion or career advancement opportunity? That looks better than random job hopping.

• Show proof of your new employment. Provide an offer letter, employment contract, or pay stubs. Get a written VOE (verification of employment) from the new employer.

• Meet stricter requirements. Expect to provide more documentation and have more reserves. Your new job may need to start within 30-60 days of closing instead of the typical 90 days.

• Stick with the same field. Switching industries raises more concerns than getting a new job in your existing field.

• Don’t quit your old job before closing. Wait until after closing to leave your previous job, or make sure you already have pay stubs from the new employer to prove consistent income.

With proper documentation, a recent job change shouldn’t derail your home loan application. Discuss the specifics with your lender.

What to Know About Self-Employment Income

If you’re self-employed, you may need to jump through additional hoops to prove your income compared to W-2 wage earners. Here are some tips:

• Have 2 years of tax returns. Lenders need returns for the last 2 years to calculate your average earnings. One year may sometimes be acceptable.

• Document ongoing contracts or clients. Signed agreements or invoices from recurring customers show stable future income.

• Explain any growth trends. If earnings are consistently increasing each year, point that out as it shows positive momentum.

• Use bank statements. Personal and business bank statements can help supplement tax return data.

• Meet higher downpayment and reserve requirements. Expect to make a larger downpayment and have more cash reserves as a self-employed borrower.

Don’t let self-employment deter you from pursuing a mortgage. Just be prepared with paperwork to verify your income streams.

Options for Alternative Income Situations

Sometimes borrowers have unique employment and income circumstances that require creative mortgage solutions, like:

• Part-time workers – Can use W-2s plus hours/rate to calculate earnings. Second job income can supplement.

• Unemployed – Bank statements to show assets to pay bills until finding a job. Other income like alimony/child support.

• Retirees – Pensions, retirement accounts, social security income. Reverse mortgages are an option if 62+.

• Gig workers – Self-employed rules apply. Show invoices and bank statements for proof of income.

• New graduates – Use school transcripts and credentials to demonstrate potential in your career field.

• Military veterans – GI Bill income and VA loans are options.

The key is to be upfront about your unique situation and provide documents to assuage any concerns from the lender.

When to Talk to the Lender About Employment

Timing is important when it comes to discussing employment and income with your lender:

• Before applying – If you know your situation is non-traditional, touch base with the lender upfront before completing a full application.

• After starting a new job – Wait at least a month after beginning new employment before applying. Give yourself time to build up pay stubs.

• After closing – Notify the lender if you plan to change jobs after closing. Doing so before closing puts your approval at risk.

• During employment verification – Be prepared for the lender to contact your employer directly ~10 days before closing to re-verify employment.

The more upfront you are, the better prepared the lender will be to handle your unique employment circumstances during the underwriting process.

Documentation Needed to Verify Employment

No matter what your employment situation, lenders will need documentation to verify your income. Here are some common documents needed:

• W-2s and paystubs – Provide at least 30 days of pay stubs in addition to the last 2 years of W-2s.

• Written VOE – Have employer confirm your title, salary, start date, and status in writing.

• Verbal VOE – Lender contacts employer by phone as well to verify the written VOE.

• Tax returns – Last 2 years of returns are required if you’re self-employed or have supplemental income sources.

• Signed employment offer or contract – Required if you’ve recently switched jobs; must not have contingencies.

• Bank statements – Assets and payments in your accounts provide additional income proof.

• Transcripts or diplomas – Relevant if recently graduating and entering a new career.

Be responsive to all requests from your lender for employment documentation. Gathering it early simplifies the verification process.

Factors Besides Income That Influence Approval

While employment and income are critical factors lenders evaluate, they aren’t the only pieces of the puzzle. Here are some other aspects considered:

• Credit score and history – Good credit will help offset concerns about short employment history.

• Debts and expenses – Your whole financial picture impacts your ability to handle a mortgage payment.

• Down payment amount – Larger down payments reduce risk for lenders.

• Cash reserves – More savings provides a buffer in case of income disruption.

• Home equity – For refinances, equity built up over time supplements employment gaps.

Don’t get discouraged if your employment situation isn’t perfect. Offsetting strengths in other areas could still get you approved. Discuss options with both real estate agents and lender partners.

The Takeaway on Employment Requirements

Changing jobs, being self-employed, or having unique income circumstances shouldn’t by themselves make you give up on homeownership dreams. Mortgages may still be possible with proper documentation and the right approach.

Being transparent with lenders is the best policy. Provide ample paperwork verifying your income sources. Show reserves to cover payments if disrupted. Highlight other strengths like your credit score and down payment funds.

Most importantly, don’t make job changes right before applying or closing. Give yourself time to establish a history in the new position first. Stability and continuity are most important.

With preparation and an understanding of lender requirements, you can confidently navigate the home loan process even when your employment situation doesn’t fit the traditional mold. Partner with lenders willing to consider the full picture of your finances. You may be pleasantly surprised at what you can qualify for.