Your monthly income and job stability are two of the most critical factors that determine your mortgage qualification. Your earnings give the potential lender an idea of how big a monthly mortgage payment you can afford without any difficulty. To be able to demonstrate the lender that you have a consistent income is critical to be able to gain their confidence. Income can include things like child support payments, alimony, investment returns, disability, and retirement benefits. However, the significant chunk of your income usually comes in the form of wages and salaries.
To verify your income, lenders will usually require one month of pay stubs, W-2 forms for the past two years, or 1099 forms if you’re self-employed. Federal tax returns for the last two years and verification of employment will also be required.
Types of Pay Structures
Your income structure also impacts the way a lender looks at your pay income. W-2 income is seen as consistent and stable. On the other hand, income types such as commissions, bonuses, and overtime are seen as less stable. It’s hard for mortgage lenders to assess incomes which fluctuate. Hence, they take a conservative approach to forecast your future income.
Switched your employers recently? Your lender may ask for more documentation if you haven’t been at your workplace for at least two years. The documents may include an employment verification letter and an explanation as to why you changed your jobs. As long as you can provide all the documents, your job changes won’t negatively impact your loan application. The situation gets complicated if your job switch involves a difference in your pay structure. Since every employer has a different structure when it comes to awarding commissions and bonuses, it becomes harder for lenders to assess these types of incomes at a new job without two years of history. The same applies to part-time work. As it is hard to determine how many hours you will work every week, it becomes difficult to calculate your overall income accurately.
Job Changes During Your Loan
It is advisable not to switch jobs during your loan application. Changing workplaces during the mortgage process can make it tedious and burdensome because your lender will need to carry out the whole underwriting process again to factor in your new employment details. Furthermore, you’d also need to provide additional paperwork to verify your new job and income. Moreover, in some cases, your whole application might be rejected. There can be an instance where your job change is inevitable. Hence, in this situation, it is wise to inform your lender as soon as possible so that they can work with you to arrange all the new documentation and be proactive in carrying out the whole process accordingly. Informing your lender early will ensure that you don’t get any last-minute hiccups and the entire lending process proceeds smoothly.
Gaps in Employment
Significant differences in unemployment between job changes is a potential red flag to a lender. Due to the mortgage industry requirements, lenders need an explanation for any gaps which are longer than 30 days. The analysis of these gaps depends on your situation, but the general rule of thumb is to look at whether your work and salary are stable and likely to continue or not.
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