Buying Your First Home: Employment Challenges
First-time home buyers often face challenges that don’t affect experienced home buyers.
For example, first-time buyers tend to have less money saved for a home down payment; and, they often carry a collection of student loans and other debt which makes budgeting for a household difficult.
They also face challenges with respect to employment.
First-time home buyers tend to skew younger than the general home-buying demographic with many first-time buyers are just getting started in their careers.
Getting approved for a home loan when you’re new to a job can be both nerve-racking and a challenge. It’s one of the reasons why first-time home buyers account for 1-in-3 homes sold nationwide despite today’s mortgage rates and a wide array of low- and no-downpayment mortgages.
Buyers fear they can’t get approved.
The reality, though, is that you don’t always need years and years of work experience in order to get home loan-approved — you can get approved on just the strength of an offer letter.
This post discusses employment; and, is the next in a series meant to help first-time home buyers buy their first home.
What Work History Is Required To Get Mortgage-Approved?
When you’re applying for a mortgage loan, your ability to repay is paramount to the lender. Banks won’t make loans to a borrower with no capacity to repay.
This is why employment plays such a large role in the mortgage application process.
Lenders are concerned with the jobs you’ve had in the past, the job(s) you hold today, and the job you may hold in the future. They want to make sure you have a plan for your career — and that your plan is working.
Remember that, in general, a first-time home buyer lacks the employment depth of an experienced home buyer. A first-time home buyer may be fresh out of college or graduate school; or may be just a year or two into its career.
There’s no history of pay raises or promotions with a first-time buyer, which is why mortgage lender place so much emphasis on the prior two years of employment.
In looking at your last two years of employment, lenders can see whether you’re focused on a single industry or job function, which improves your chance for promotion; or whether you’re floating from position to position with no real regard for the future.
For example, if you were a staff accountant in the software industry and changed jobs to be a staff accountant in the medical field, that would considered an acceptable lateral move by a lender.
However, if you left your staff accountant job in the software industry to become a human resources representative in the entertainment industry, that move would not be considered a lateral move — it would be considered a fresh start.
That said, lenders have been known to make exceptions to the “employment history” part of the mortgage application for all sorts of reasons.
In general, your lender just wants to make sure that your household income is stable, and will be ongoing for period of at least three years.
They’re also concerned with your income.
How Much Income Do I Need To Get Mortgage-Approved?
To get mortgage-approved as a first-time home buyer, it’s not just your job that matters — your income matters, too.
However, because of how mortgage lenders calculate income, first-time home buyers can be at a disadvantage as compared to other buyers of homes.
This is because first-time home buyers don’t often have the work history that an experienced buyer will have. As a result, not all income can be counted toward your mortgage application.
A few common scenarios are listed below. If you have questions about how your particular income would fit into the loan approval process, be sure to ask your lender.
When your income is an annual salary
When your income is an annual salary, your lender will divide your annual income by 12 months to determine your monthly income. In general, you do not need to show a 2-year history — especially for jobs which require specific training or background.
When your income is an annual salary, plus a bonus
When your income is an annual salary, plus a bonus, your lender will calculate your income in two parts.
First, your lender will divide your annual income by 12 months to determine your monthly income. Then, it will take your bonus and check to make sure it’s been paid to you during the two most recent years.
If the bonus has been paid to you for the past two years, your bonus payments will be added, then divided by 24 months. This amount will be your monthly bonus income.
If the bonus has not been paid to your for the past two years — even if it’s guaranteed and written into your contract — the income cannot be used on your application.
When your income is hourly
When your income is hourly, your lender will average your prior 24 months of income, and will use that figure as your current monthly income.
However, if you’ve received a pay raise, are at the same job/employer, and can demonstrate that your hours have been roughly unchanged, you may be able to apply your current monthly income on your mortgage application.
This calculation is at the lender’s discretion.
If your hours have been erratic, or if you’ve recently changed employers, your income calculation is likely to be affected negatively.
For first-time home buyers with less than two years of work experience, hourly wages are difficult to verify for a lender.
When your income includes overtime pay
When your income includes overtime pay, your lender will add your prior two years of overtime pay, and divide that figure by 24. The quotient will be used as your monthly overtime pay, unless you cannot show two years of overtime pay.
Without a 2-year history of overtime pay, your lender may not allow you to claim it on your mortgage application.
When more than 25% of your income is commission
When you earn more than 25% of your income from commissions, your base income is calculated as the monthly average of your last 24 months of income.
If you have less than 24 months of commissioned income, your commissioned income cannot be used for purposes of a mortgage approval.
Without fewer than 24 months working as a commissioned employee, then, it’s unlikely you’ll be mortgage-approved.
When you are self-employed
When you are self-employed, mortgage lenders will want to see two years of verified income, and will average that total to find your monthly household income.
If you can’t show 24 months of income because your business is too new, it’s unlikely that you’ll be mortgage-approved. However, lenders have been known to make exception on this rule — specifically, for recently self-employed persons who have started a business in a “related field”.
For example, if you worked as a staff accountant at a company and left to start a staff accounting agency which services third-party firms, you may be able to submit just one year’s worth of income in order to be mortgage-approved.