You may be aware that the mortgage application process differs slightly depending on your type of employment. It’s not that mortgage companies favor a W-2 employee over the self-employed or a full-time employee over someone whose job is commission-based. It simply boils down to differences in verifying employment, income, and job stability.
It’s fair to say the last year has brought up some additional concerns for all types of employees when it comes to how a job affects qualifying for a mortgage. We know the pandemic placed additional hardship on millions of people, whether they were hourly workers, self-employed, or commission-based. Some were laid off, others took pay cuts, and quite a few changed careers.
This is why it’s more important than ever to understand exactly how your job affects your mortgage based on your type of employment.
Types of Pay
Before we break down how lenders consider your employment record, let’s talk about the various employment categories.
They tend to consist of:
- Full-time employees who receive a regular salary on a specific schedule and receive W-2 forms from their employer at the end of the year
- Hourly employees who are paid a specific rate for the hours they work. Pay is regularly scheduled but fluctuates based on the number of hours worked. Hourly employees also receive W-2 forms at the end of the year
- Self-employed individuals are paid for a specific service or product, based on delivery times, invoicing, and billable hours or services. Income can fluctuate greatly depending on the business and the timeframe. Self-employed people typically receive 1099s from paying clients at the end of the year for service-based income and if operating a small shop like Etsy, a 1099-K for the total sales for the year.
- Sales representatives who are paid via commissions and bonuses may receive a 1099 for the commission portion of their income and a W-2 for the salary portion (if any), or they may receive one or the other by itself. The biggest factor for qualifying with this type of income is stability. The underwriter will look at how stable the commissions or bonuses are over two or more years to include it in the overall income for qualifying purposes.
How Lenders Consider Employment Income During Underwriting
Regardless of your income or payment structure, lenders want to be sure you’ll be able to comfortably pay your mortgage—both now and in the future. While they don’t have a crystal ball, lenders can do this by examining your job history, current employment, and income over the past two years. For 1099 individuals who may be wondering how your job affects your mortgage, lenders will typically look at your gross (pre-tax) income, minus any expenses, losses, deductions, etc.
In addition to your tax returns, lenders will want to take a look at any other forms of income you may have, including investments, rental properties, retirement accounts, and more. Note that non-recurring income, such as signing bonuses, sales proceeds from a large-ticket item, inheritances, or lottery winnings, is not counted as income for the purposes of qualifying for a loan. These funds can be used toward your down payment, however, and being able to show a healthy down payment of at least 20% will always be in your favor.
Once your income is established, the lender will turn its attention toward your debts. You guessed it—they’ll be reviewing any current mortgages, loans, credit cards, and other outstanding debts. All this information is then used to calculate your debt-to-income (DTI) ratio, which is the percentage of your income that you use towards all your payments in a month. You ideally want your DTI ratio to be below 45%, regardless of which employment category you fall under. Of course, your credit score and credit history will play a role as well.
A self-employed individual who has a high credit score, very little debt, and a long history of stable earnings would have a much better shot of securing a mortgage than a full-time W-2 wage earner with poor credit and a DTI of 75%.
What if You Switched Careers?
You might be wondering how your job affects your mortgage if you switched careers—or switched employment categories. A job change isn’t necessarily a bad thing. This is especially true if you remain in the same line of work and your salary is equal to or greater than what you made at your last place of employment.
Your lender may ask you about any changes, especially if you go from being a W-2 employee to a 1099 independent contractor, but a little explanation and additional paperwork can help mitigate these concerns. Lenders may ask for additional bank statements (both personal and business), a year-to-date profit and loss (P&L) statement, or other documents to confirm the viability of your independent employment. Your loan advisor can help by doing an initial review of your income and work with you on how to prove your creditworthiness.
What if You Can’t Show Two Years of Employment History?
Not to worry if you’ve just graduated from school and can’t show two years of employment. Many lenders will count your time in school as part of your job history if your degree is in a related field. Gaps in employment can also be explained if you take some time off to raise a family or care for elderly parents. Lenders may want to dive deeper into your job history to show you were a consistent employee before the break, but if the gap is easily explained, it’s not necessarily a deal-breaker on a mortgage application.
The most important thing you can do during this time is to be honest with your loan advisor. They can address how your job affects your mortgage or answer any questions an underwriter may have if you’re forthcoming about your situation. This includes all income sources, debts, recent large purchases, and changes in employment or income. Remember, your loan advisor is your friend! They want to see you in your dream home and are willing to work with you to make that happen within the requirements.
What if You Change Jobs While Applying for a Mortgage?
You know that whole thing about honesty? Let’s keep that going! Always be forthcoming with your loan advisor about your job situation. Even if the job change was last minute. Even if you feel like this news will disrupt the process. Because here’s the thing: lenders are going to confirm that you’re still employed by whomever you listed on your mortgage application in the last few days before your loan is finalized.
Finding out that you’re no longer employed by that company—or that you’ve made a big-ticket purchase like a car, boat, or furniture—during the underwriting process can fundamentally change your qualifications and can be seen as a red flag by underwriters. However, if you inform your loan advisor of this change they can work with you to revise your documents and ensure all your information is accurate before the loan closes.
Trust us, these little “omissions” won’t squeak by. The last thing you want is to believe you’ve qualified for a loan, made an offer on a home, and won that offer . . . only to realize really late in the game that you are no longer qualified and your loan won’t fund. This isn’t a fun scenario for anyone—the home seller and lender included!
It’s definitely normal to wonder how your job affects your mortgage—and we’re here to help. Contact an APM Loan Advisor today, and we can answer any questions you may have about your specific employment situation.