Monday, March 22, 2010

Our Most Popular Post

We've had 1608 unique visitors come to our blog site so far in 2010, and 596 of those visitors were trying to find out how long someone needs a job before being able to get a mortgage. That is by far the most popular post.

Since so many people are interested in that subject, it's worth discussing some more. Here's the original post with some updates (UPDATES IN CAPS):

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. UPDATE: EVEN THOUGH THE AUTOMATED UNDERWRITING SYSTEMS MAY NOT REQUIRE A FULL 24 MONTHS OF SELF-EMPLOYED INCOME, MOST LENDERS DO REQUIRE 24 MONTHS AT THE SAME SELF-EMPLOYED JOB.
-- 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.

UPDATE: IN ADDITION TO THE LENGTH OF TIME MENTIONED ABOVE FOR THE DIFFERENT TYPES OF JOBS, THE LENDER WILL WANT TO KNOW THAT THE BORROWER HAS A GOOD CHANCE OF KEEPING THEIR JOB. UNDERWRITERS FREQUENTLY ASK FOR A WRITTEN VERIFICATION OF EMPLOYMENT FROM THE BORROWER'S HR OR PAYROLL DEPARTMENT. IF THERE IS ANY INDICATION THAT THE JOB IS A SHORT-TERM CONTRACT POSITION, THE INCOME MAY NOT BE ACCEPTABLE.

THE BIGGEST MISTAKE A BORROWER CAN POSSIBLY MAKE IS TO ASSUME THEY KNOW THE UNDERWRITING RULES. EVEN READING THIS BLOG POST DOES NOT GUARANTEE THAT YOU WILL INTERPRET THINGS CORRECTLY. ALWAYS TALK TO A KNOWLEDGEABLE MORTGAGE LOAN ORIGINATOR (THAT'S THE NEW NAME FOR SOMEONE WHO SELLS LOANS) BEFORE ASSUMING YOU CAN OR CANNOT GET A MORTGAGE.

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