Applying for a mortgage and buying a home can be particularly stressful. The complexity of the underwriting process compounds the stress. This is when lenders look at your finances to decide whether you qualify for a mortgage. One of the most important factors is looking at your employment.
When most people think about buying a house, their mind goes to whether they’ll be able to afford a down payment. However, thinking about the mortgage and getting approved for one is also important. This is because lenders consider assets and income when making their decision. There are many aspects of employment that tie into mortgages. These include employment history, type of employment, and even current monthly income.
In this article, Robert DeFalco Realty will discuss how employment affects your mortgage.
Importance of Employment for Mortgages
Employment is an essential part of the mortgage process for an important reason. Lenders use employment as a measure to see whether the borrower will be able to repay their loans. They do their best to ensure that the buyer is in a good enough financial position. This way, they can make monthly payments.
While employment is the main factor they look at, they’re not just interested in employment status. Lenders also look at the type and length of employment and employment history. All these factors will determine whether you get approved for a mortgage. They also determine the mortgage amount you get approved for. Thus, it’s critical to show lenders you can financially take on the responsibility of a mortgage.
Lenders also consider other factors such as your income, credit history, and age. They also assess individual and situational factors when making the final decision.
Employment Factors That Affect Your Mortgage
It’s not just your employment status that lenders look at. When you’re applying for a mortgage, lenders consider many factors within employment. We have discussed them below.
Type of Employment
Besides your employment status, mortgage brokers also consider the type of employment. This refers to whether you’re a full-time employee, a part-time employee, a contractor, etc.
Full-time, permanent employees face the easiest time dealing with lenders. This is because it is straightforward to confirm their employment and income. If they’re salaried and paid the same amount every month, they can make monthly mortgage payments. To prove this, you’ll likely need payslips and a confirmation letter from your employer.
Salaried Employees with Commissions
Another case is when you’re a salaried employee and make a commission or a bonus. You’ll also likely have an easy time with lenders. This will be easier if you’ve been earning commission or getting bonuses for at least two years. Lenders will look at your base income and the average commission or bonus you earn as your total income. However, if the bonus or commission is more recent, they may just look at your base salary when deciding. You will need payslips and a confirmation letter from your employer. You may also need details about the commission or bonus structure.
Part-time employees should be aware that lenders could be concerned about them. They may think you may not meet their payments working the number of hours you currently do. However, this is more acceptable as long as it is permanent part-time employment. You can prove this by using payslips and other documents.
Self-employed individuals also face some scrutiny from lenders. Their businesses have different taxes and deductions to fill out. Thus, they may need to provide extra documents to convince lenders they’re financially stable. Self-employed people need to establish a pattern of income. They also need to convince lenders that they’ll generate income in the future. This is the most thorough most lenders will be, so it’s essential to have all your documentation in order.
Contractors must remember that temporary roles with end dates seem precarious to lenders. Instead, they prefer contractors with extended work dates. Lenders may think contractors could have trouble making future mortgage payments. That’s why lenders usually ask for longer contracts and use that to determine the average income throughout the contract.
Probation and Temporary Employment
Many lenders don’t consider temporary employment or income from those on probation. This varies from lender to lender. However, it’s usually a good rule of thumb to get a permanent or reliable job before pursuing a mortgage, especially if you want more favorable terms.
Employment History and Gaps in Employment
Lenders going through your employment history is also an integral part of the mortgage process. They will try to determine how predictable you are and look for answers for any gaps in your employment. Easily explained gaps aren’t major issues. They include maternity leave, temporary disability, and pursuing further education. However, long, unexplained gaps in work tend to be a problem when you’re trying to get approved for a mortgage.
Lenders also consider the length of each job. For example, if you get new jobs within the industry, these are usually fine with an explanation. Going outside the industry may need extra context and may bring stability questions. Frequently changing jobs is one of the major things lenders look for about employment history. This is a sign of instability and may convince them you’re not reliable enough for a mortgage.
Other red flags include large increases and decreases in income and less than two years of employment history. However, these all depend on context. Explaining gaps and patterns is important to assure lenders they can rely on you.
Robert DeFalco Realty Can Help You Find Your Dream Home
Going through the mortgage and home buying process is no easy feat. That’s why it’s always important to have an experienced realtor by your side to guide you through the homebuying process. Robert DeFalco Realty has experienced real estate agents that can help you find your dream home or investment property. We have offices all over New York and can help with both residential and commercial real estate purchases. Call us at 718-987-9700 or reach out to us here for more information.