Both taking out and giving out loans is inherently risky. You can never be 100 percent sure what will happen across a period of 30 years, and what circumstances might lead to someone defaulting on a loan. There are a series of checks in place to help lenders determine whether a borrower is a safe bet. One of these is credit score, which we’ve spoken about at length during previous posts. Another is income…and not just how much you make.
One of the simplest bits of advice we can give to those seeking a mortgage is to wait until you have at least two years at your current job. This consistency in paychecks convinces lenders that you’ll be reliable in your own payments.
Unfortunately, this system is a little unfair to certain segments of the workforce. Many people work the same periods of time for their employers, and make at least as much as those with a salary, but that isn’t necessarily reflected in their base salary paychecks.
You work just as hard as a salaried employee and you deserve to qualify for a mortgage without the hassle. If you find yourself on this list, take note of what to do when applying for a mortgage!
If your income depends on the success of the business you own, you may run into some issues if profits waver.
Let’s consider that you own a greenhouse. Perhaps you commonly make $100,000 a year. However drought conditions hurt your supplier two years ago, and you only brought home $60,000. An underwriter will look at your last two years of income and divide by 24 to determine your monthly income. That one down year could take nearly $1,700 from your “average” monthly income.
There are conventional programs that only require one year of income for consideration, preventing the one bad year from hurting your cause.
But what if your business hasn’t even been around for two years?
There are a few options here. If your previous employment is similar enough to your current business—such as a lawyer breaking away to start their own firm—underwriters may accept one year of income from your current job and one from the previous. If your last job wasn’t relevant to your current one, you still have conventional mortgage options.
II) Two Jobs
Some people simply don’t make enough at their primary job to reach their mortgage goals, so it’s sadly ironic when these ambitious people take a second job to help qualify…and still fall short.
Lenders are wary of applicants quitting their second job after qualification, lessening their expected income in the process. Therefore they require two years of employment at both jobs in order to qualify. If you can provide W2s for both positions, then they’ll average your monthly income between for the purpose of qualifying.
If you’re considering taking a second job but don’t want to commit two years to the process, consider taking a cash gift from a relative instead. This makes sense if the cash gift is to put enough down so they can qualify for the mortgage with only one job.
III) Tip-Based Income
More than 2.5 million people work as waitstaff at restaurants in the United States. Add bartenders and hotel staff, and there are a lot of individuals who depend on tips as part of their livelihood. Many of these are paid minimum wage, which makes tips essential to qualifying for a mortgage.
Many people who count tips as a major part of their income shoot themselves in the foot, however, by not reporting these earnings for taxes. Just like with other employment, you should be prepared to present two years worth of documents that accurately reflect your income. If these documents only reflect your base salary, you’ll be left out in the cold.
You can save a few bucks on taxes by not reporting tips, but if you plan on applying for a mortgage, make sure you plan accordingly!
IV) Commission-Based Income
Earnings that are based on commissions create a situation more similar to self-employment than tip-based income, believe it or not. Although you’ll be paid on top of your salary for better performance, these increases will probably be reflected by your employer on your W2.
That said, you could still run into trouble if your earnings wobble from one year to the next. If you can provide documentation to suggest that your commissions will remain consistent in years to come, an underwriter may consider it. If—like a Hummer salesman post-2006—your industry is in a nosedive, you may need to try for a one-year review.
V) Planned Cycles of Unemployment
This one may surprise people. Some industries come with expected periods of unemployment. Consider construction, for example. If a major project is completed, or seasons cause a significant delay, workers may go a month while collecting unemployment, confident that soon they’ll soon be back on the job. One can actually qualify for mortgage if they’ve been active within this system for a period of years.
As with every other circumstance on this list, consistency is key. If you can present W2s and documented proof of collected unemployment benefits for at least two years, you can qualify for a mortgage. In this case, it may be optimal to provide even more than two years worth of paperwork, to tide the underwriter over if nothing else.
Some conforming loans only require one year’s worth of employment documents. Make sure that you’re being responsible if you opt for these. The limits for mortgage qualification are partially there for your protection as well, to prevent you from engaging in unsustainable borrowing.