Employment Concerns for First-time Home Buyers
The first-time home buyer (FTHB) often deals with obstacles in the mortgage process that don’t affect experienced home buyers, house flippers or rental property owners.
One of the hurdles for FTHB’s is they usually have a minimal amount of funds saved to put down on a house. When it’s your first home, that is very typical. Other common challenges are their overall household debt to income ratios are impacted by college loans, auto loans, and credit cards.
Most first-time buyers are under 35 years old and may have a spotty employment record or hold multiple side jobs to make ends meet.
Believe it or not, there is a way to purchase a home without a long or stable employment history.
A job by itself offer may qualify you for a mortgage. However, if your job pays you a bonus, commission, or overtime, it will not be calculated into your income if you have under a two years history of receiving this type of pay. If your job pays you in cash, it becomes more unlikely that it will be accepted unless you claim it on your tax returns.
First-time home-buyers have a wide range of low- and zero-down payment home loans.
How much work history do you need to buy a home?
Anytime a borrower applies for a home loan, the lender wants to see your credit report which will confirm your willingness to repay your debts. Your income shows the lender your ability to repay.
For this reason, your employment becomes a major factor during the loan application process. Underwriters investigate your past employment, your current job,your type of income, and if applicable, the job offer letter you provided.
For the most part, there’s only a few jobs that the typical first-time home buyer can show companies where they’d like to work. The reason why is many just graduated from college with a bachelor’s or master’s degree and only can show a two-to-three job early in their career.
Lenders tend to require borrower’s having two years of employment but this doesn’t mean you have to be traditionally employed within those past two years.
Of course, there are the really easy cases.
Let’s say you were a staff biologist in the medical industry, and changed jobs to become an infectious disease doctor in the medical field, that would be an acceptable position change by a lender.
Acceptable job histories there are the non-traditional.
What if you just finished your computer science degree and then during the summers you worked as a software designer. Then once you graduated you were offered a full-time software design position.
Therefore, if you’ve only had a full-time job for a year your home loan approval chances are not all that dire.
Nevertheless, a lengthy employment history can be negative if you were a bookkeeper for a year, switched to become a landscaper for a few years, and then began a video marketing job. That simply doesn’t sound like someone with a reliable career background.
How long must you be on the job to qualify for a mortgage?
There is not a clear-cut answer in the world of residential loans. It actually does depends on other factors.
For example, for conventional loans by Fannie Mae and Freddie Mac there’s different requirements than government-backed loans such as FHA or VA.
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.
| Loan Type | Employment Length Required | |
| Conventional | Two years of related work or educational history | |
| FHA | Two years of related history. Need to be at current job 6 months if applicant has employment gaps | |
| VA loans | Two years or relevant schooling or military service. If active military, must be more than 12 months from release date |
However, it also states that less than two years is adequate, provided the borrower’s profile demonstrates “positive factors” to make up for brief work history.
What are these factors? Education is a perfect one. For instance, you have a four-year degree in the industry in which you are currently working. That type of education ninety-nine times out of one-hundred is considered a part of your employment history. New grads typically have no problems qualifying regardless if their job started recently.
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?
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 have good explanations for any gaps.
If an extended gap occurred, the borrower must be employed in their current job for six months, and has to present a two-year work history before the gap. The underwriter for the lender will then examine the probability of employment that will continue. 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.
Not to worry if in the last couple of years you had switched jobs a lot. This is allowable provided each new job was a move ahead in your profession.
Just like with other loan types, FHA requires two years of documented history of overtime, bonus, and other variable income.
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Summary:
- Salary: Lender calculates your current annual salary
- Bonus: The lender averages your actual bonuses over the last two years’ to determine bonus income
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If you have received bonus income for a minimum of two years, and the employer confirms that your bonus income will continue into the foreseeable future, lenders are able to count it as “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 falling year-over-year, they may decide to lessen or just disregard this income.
Borrowers who are self-employed
Mortgage lenders require a minimum of two years of verified income when you are self-employed. They then use a complex form to calculate your “qualifying” income.
It’s not unusual for employees to switch from salaried to an “independent contractor” or 1099 status, which is considered self-employment, but receiving the same or higher income.
References: HUD Handbook 4155.1 Section D. Borrower Employment and Employment Related Income
