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How Work History Affects Home Loans

Work history, changing jobs

How does your work history affect your chance of a loan approval?

Orange County, CA- Work history can have a profound impact on your ability to qualify for a mortgage. One of the first questions a loan officer will ask you is “How long have you been in your field of work?” You may have heard that lenders like at least 2 years in the same line of work. It shows a level of stability. Having a consistent 2 year work history is ideal. However, it isn’t always a hard and fast requirement.

Consider this: Making a move up the corporate ladder is always a good thing. Better opportunities mean a better quality of life for you and your family. Now, you are ready to buy a bigger home in time to register your child for school in the fall. You found a home and are ready to make an offer today but you’ve only been at your new job a few months. Are you out of luck?

It’s fine to change jobs if you stay in the same or a similar line of work. As long as you don’t substantially change your work history. For example, if you were a Project Manager for a software company who accepted a position as Development Manager for a computer company. So even if that step up the corporate ladder meant moving companies you don’t have to worry. Why? The skill set is similar. The role is similar. When there is consistency among the roles and responsibilities of the position, then you should not worry.

This can get more convoluted if you are self-employed. This has more to do with the income calculation then the change in work history. For self-employed earners, underwriters will base their income calculations on the filed tax returns. In most cases, the income will be averaged over 2 years to determine a consistent amount. One year is not a good sample size to determine how a business is performing.  However, if you have been self-employed for at least 5 years, some programs only require 1 year of tax returns for income qualifying. For example in 2015 you earned $60,000. In 2016 you earned $100,000. If approved, you can qualify with the 2016 income only and don’t need to average 2015 with 2016. That can make a significant difference in the loan size you’re able to get approved for.

But let’s assume that you’ve been in business for many years. You meet a new CPA and they suggest changing entities to minimize your tax liability. So you switch from a Schedule C to an LLC. That will change the income calculation structure and may require a 2 year work history.

If you were a W2 employee that switched to self-employed within the same industry. Since there is no record of how you run your business, a 2 year work history will be necessary. This means that you will need two years of filed tax returns showing the self employment income, not 24 months of employment.

Some other things to keep in mind:

  • If you recently graduated and have only been at your position a short time, school transcripts can be utilized to backfill your employment timeline. For example: You were studying engineering and recently got a job as an electrical engineer. Since the field of study is consistent with the field of work, it would be acceptable for an underwriter. The transcripts would fulfill the 2 year work history requirement.
  • Often times there can be a gap between when you leave one job and start another. If this gap in employment is prolonged, it will need to be explained.

Click here to watch a short video about this topic.

As always, the best way to be sure is to ask! We are always available to answer your questions about this or any other topic pertaining to the home loan process. Contact us today!

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