Sunday, January 4, 2009

How Long Must a Borrower Have a Job Before a Lender Will Use Their Income to Qualify for a Loan?


Many people are changing jobs these days and we are getting a lot of questions about how long someone must be employed before a lender will use their income. Here are the rules:

-- If the borrower is paid as a W-2 employee (not self-employed), then an underwriter will only need to see one pay stub in order to count the income, provided the current job has something to do with the previous job.
-- If the borrower is a W-2 employee, but their current job is in a different field than their previous job, then the automated underwriting systems at Fannie Mae, Freddie Mac, FHA, or VA will tell us how long they have to be at the job.
-- If the borrower just graduated from school and gets a job in their field of study, then they don't need anything more than one pay stub and their diploma.
-- One exception to the W-2 rules is when the borrower earns more than 25% of their income as commission. In that case, the automated underwriting systems will tell us how long they have to be at the job. It could be as short as 6 months or as long as 24 months.
-- If the borrower is self-employed, then the automated underwriting systems will tell us how long they need to have the job, just as if they are paid commission. It could be anywhere from 6 months to 24 months.
-- If the borrower is employed part-time or has a second job, then once again, the automated underwriting systems will tell us how long they need to have the job. Anything less than 24 months for a second job is generally unacceptable.

One thing to keep in mind when dealing with commission or self-employed borrowers is that the income is either averaged over the last 24 months, or annualized (for example, if someone has had a commission job for 6 months, the underwriter would divide that 6 months of income by 12 months to annualize it).

The reason for the different rules is that the lenders are concerned that the income is stable. A new job in the same field as the previous job is stable. A new job for a recent graduate in their field of study is also stable. A commission job is a little less stable. Self-employed income is the least stable of all for full-time employment. Part-time employment or second jobs are extremely unstable.


Jeff Andrews said...


Along these lines...

My scenario is that I have a California S Corporation. My wife and I are moving to Oregon. We would like to buy a house in April of next year (about 9 months from now).

I will have to dissolve my CA S-Corporation and start an Oregon S-Corporation to get the group health insurance (go figure!)

I currently have 5 years of corporate California history. If I dissolve my CA corporation and start a OR corporation (under the same name of course) will lenders have a problem with that since my corporate history will be very short in Oregon? Or are they more concerned with my personal tax returns. Technically since I get paid by the company (my own company) will they consider this a 'material change' in employment? I will still be able to give them 2 years of returns for being self-employed.

Any advise would be great!

Thanks in advance, Jeff

Chris and Debbie Thomas said...


It all depends on the type of business you have. If you will have the same clients in OR that you currently have in CA, then you will be able to get a loan right away. However, if you are going to have to grow your business in OR with new clients, then you will have to wait 2 years before getting a mortgage. You must be able to show that it doesn't matter to your clients where your business is.


martin smith said...


I quit my job two years ago to care for my ailing father. He has paid my bills and living expenses but I have received no salary per se. I have 140K in cash and zero debt. My FICO score is low to mid 700s. Would I likely be denied a mortgage for a 250K home. If so, would I have to have a part-time or full-time job for a stretch in order to qualify?

Trace S.

Chris and Debbie Thomas said...

Trace - Without any income, it will be impossible to get a mortgage. You will need to have a job for at least 6 months after being out of work for that long.

johnwm73 said...

I am applying for a HARP 2.o loan. I have 2 jobs. One I have been at for 18 years and the 2nd job I have been at for 1 year 4 months. The loan company says because I haven't been at it for 2 years at the 2nd job they will have to file an acception with Fannie Mae to get it so it will be used as income. How likely s it that Fannie Mae will accept the acception? If not what are my options?

Chris and Debbie Thomas said...

The Fannie Mae underwriting guidelines say that you need to have a second job for 2 years before you can count the income from that job. However, the lender is the one to interpret the rules as they see fit. They are lying to you when they say they are filing an exception with Fannie Mae about this. Fannie Mae is not the one to underwrite the loan and does not issue exceptions. It is totally up to the lender's underwriter. I recommend that you contact another lender and ask them if they will accept the income from the second job. If the underwriter feels that your income from that job is stable, they will probably approve the loan.