Consistent Employment History Archives

How Important is Job Stability?

You might think of job stability as finding the job that pays you the most. Your lender may look at it differently, though. They want someone that shows reliability. A person that hops from job to job isn’t reliable in the eyes of a lender.

There are exceptions to the rule, though. You aren’t stuck at your same job forever. If a better opportunity comes along, it may be worth it to take it. Before you take it, consider the industry and the pay. They both play a role in your ability to secure a loan.

The Industry You Work in is Important

Lenders like to see consistency. This doesn’t mean working at the same mundane job year after year. If you change jobs, they like to see it within the same industry though. Here are 2 examples:

John works as a teacher for 3 years. He decides he is unhappy at that school so he changes jobs. He decides to become a real estate agent. He also applies for a loan 2 months after changing jobs. He might face difficulty because of the drastic change in industries.

Jan works as a teacher too. She decides after 3 years that she wants to go for a job as a principal. She gets the job, but at a different school. She too applies for a mortgage just 2 months after changing jobs. Jan has an easier time because she stayed within the same industry.

You might wonder why lenders care so much about the industry. It just makes sense, though. If you change like John did from teaching to real estate, you don’t have a lot of experience in real estate. Who is to say that you will succeed in that new career? John is seen as a risky borrower.

Jan, on the other hand, stays within the same industry. Yes, she changed jobs, but she has experience in the industry. Her job change was just an upward movement, not something completely drastic. The chances of her succeeding are much higher than John’s chances.

The Pay Structure Plays a Role Too

Sometimes staying within the same industry isn’t enough, though. Lenders care about your pay too. For example, going from a salaried employee to a commission employee is a whole new ballgame. Lenders look at this as risky. They would rather see a 2-year history of the commission income before giving you a loan.

If you do change jobs before getting a loan, try to keep within the same pay structure. If you are an hourly employee, switch to another hourly paid job. However, this is one case where going from hourly to salary wouldn’t be a bad thing. Lenders look at salary as the least risky because your income is predictable. It might even be more predictable than your previous hourly job.

If you are currently as a salaried employee, stick with another salaried job. Switching to hourly, commission, or bonus income only makes you look riskier. Lenders prefer that predictable salaried income. If you do switch, be prepared to wait until you have at least 2 years of the new income before applying for a loan.

The Worst Job Change You Could Make

Honestly, there is one job change you should not make before applying for a loan. If you consider going from a salaried or even commissioned employee to an independent contractor or entrepreneur, don’t. This isn’t to say that becoming your own boss isn’t a great thing – it could be. But, it could also leave you without the ability to secure a loan.

There are very few, if any lenders out there that will give you a loan just after starting your own business. At a minimum, lenders need 1 year of self-employment income to qualify you for a loan. Most lenders, however, require at least 2 years before they’ll consider your loan application.

So is it a mistake to change jobs right before taking out a loan? It depends on the circumstances. No two borrowers will have the same answer. For the borrower going from salary to commission, we caution you to wait. The same is true for any borrower wishing to open their own business. If you do, be prepared to wait at least 2 years.

Any other job change, however, might be okay. It’s best to talk to your lender first. See what they say. If you don’t like their answer, shop around. Get a variety of answers from different lenders. Then you know exactly where you stand.

How Compensating Factors Help Stated Income Loans

Stated income loans are still around, believe it or not. While they might have the same name, though, they are a completely different product. Lenders still verify your income; they just do so in a non-conventional way. If you do not have paystubs or W-2s to verify your income and your tax returns are not an accurate reflection of the amount of money you make each year because of the large amount of write-offs you take, a stated income loan might be the right answer for you. Before you start applying with different lenders, though, you should understand what compensating factors most lenders want to see in order to qualify you for the mortgage.

Large Down Payment

One of the easiest ways to convince a lender to approve you for a stated income loan is to have a large down payment. There is no minimum amount required as each lender creates their own program because subprime or alternative documentation loans are typically lender funded. So what a large down payment means to one lender might differ for another. In general, the closer you can get to a 20 percent down payment, the better off your chances are of getting approved.

You might wonder what difference a large down payment makes, but it is a very large difference. This compensating factor gives lenders peace of mind because you have such a large amount of money invested in the home. This means that you will more than likely try very hard to keep up with your payments. Let’s look at two different examples:

Borrower A puts down the lowest down payment a lender will allow. This amount is 5% of the purchase price. If the purchase price was $200,000 that means the borrower put down $10,000. That seems like a lot of money, but it is only 5% of the amount of money the lender is giving you.
Borrower B puts down a much higher down payment of 20 percent. With the same $200,000 loan amount, the borrower puts down $40,000. This is a significant amount of money which the borrower is probably very likely to work hard to avoid losing.

Both Borrower A and B put down quite a bit of money, but with $30,000 more invested in the home, Borrower B is much more likely to try to avoid foreclosure than Borrower A, which makes the lender more likely to approve Borrower B than Borrower A.

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Good Credit Score

Believe it or not, a good credit score could be the only compensating factor you need. Because stated income loans provide the lender with a risk because they are not verifying your income the standard way, but are relying on other documentation, such as your bank statements to verify your income, they want to know that you are a good risk. The best measure of your level of risk is your credit score. The higher the score, the better payment pattern you have. This means you are more likely to continue that pattern in the future, including the payments on your new mortgage. What one lender considers “good” credit might differ from another lender, though. In general, the following is how credit scores are viewed:

Scores over 750 are considered excellent
Scores between 749 and 700 are considered good
Scores between 699 and 650 are considered fair
Scores between 649 and 600 are considered poor
Scores lower than 600 are considered bad

Again, different lenders might look at scores differently, but if you have a credit score of 750, most lenders will not turn their heads at your application. On the other hand, if you have a score of 600, you might have a harder time finding a lender that is willing to give you a stated income loan because of the level of risk involved and the complicated risk you provide with your low credit score. On average, lenders want to see a credit score over 680 in order to use alternative lending, but some lenders might be willing to take a lower credit score if you can compensate in other ways.

Consistent Employment History

One thing that any lender looks for in any type of program is consistency. You need to be able to show that you stayed at the same job or at least within the same industry for the last few years. You also need to show that your income was consistent as these two factors can go hand-in-hand. Here are a few examples:

You have a five-year job history at your job, never changing positions. Your income increased slightly each year from a raise.
You have a two-year job history at your job, never changing positions and your income stayed the same during that time.
You have had two different jobs within the last two years, but they were within the same industry. The second job provided you with a much higher income than the first job. This shows that you were able to better your situation, which is typically not penalized because of the lack of a two-year job history.
You are self-employed for two years and have the proof from your licensed CPA stating that you have been self-employed during that time.
You are self-employed, but only for one year, but your job prior to opening your own business was in the same industry and was for 10 years.

As you can see, consistency can mean many different things; it does not mean you are stuck at the same job for the rest of your life if you ever want to qualify for a mortgage, even a subprime mortgage.

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