Employment Requirements for Mortgage Loans in 2011
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In this article, we are going to review some of the employment requirements for mortgage loans. As you probably already know, a lot has happened in the lending industry over the last few years. We've seen mortgage products disappear, lending requirements tighten, and new regulations put in place.
As a result of these changes, the employment requirements for home loans are much stricter in 2011 than they were a few years ago.
In a nutshell: To qualify for a conventional mortgage loan, you will probably be required to have at least two years of continuous employment history. This length of time applies to self-employed borrowers as well, though they might face additional scrutiny in other areas. With that being said, there are exceptions to every rule.
How Things Have Changed Since the Crash
You've probably heard people joke that, during the housing boom, anyone with a pulse could get a mortgage loan. This is an amusing exaggeration, but it's really not that far from the truth. At the height of the boom, mortgage loans were being given to people who had no business taking on such an obligation. Employment requirements are a good example of this.
As the housing bubble grew, we witnessed the creation of new strategies for mortgage qualification. Lenders were doing everything they could to qualify the largest number of borrowers. They were waving requirements for documentation, including those relating to the borrower's employment history. Lenders used the now infamous stated-income mortgage and the no-doc loan to qualify borrowers who couldn't document their employment or income. That's essentially what the no-doc loan means -- neither the income, assets or employment would be verified.
It seems crazy in hindsight, but this was considered business as usual during the housing boom. They're mostly extinct these days.
Stricter Employment Requirements in 2011
Today, full documentation is the general rule. This means you must document anything you want the lender to consider during the mortgage-qualification process. If you say you earn $150,000 a year, you must document that with tax records. If you say you've had steady employment for the last two years, you must document that with pay stubs and possibly a letter from your employer. The same goes for your assets.
We just touched on the three types of information that must be documented during the mortgage process:
- You must document any income you wish to use to support your application.
- You must document any assets you have that contribute to your net worth.
- You must document your employment for at least the last two years.
There's that magic number again -- two years. This is usually the employment requirement for a conforming mortgage loan. You must have continuous employment for at least two years. Granted, there are exceptions to every rule. And we will talk about those exceptions in just a moment. But first, I'd like to offer a quick definition of the conforming mortgage loan.
Conforming vs. Non-Conforming Loans
In this context, a conforming loan is one that meets certain guidelines established by Fannie Mae and Freddie Mac. You've probably heard these names before. These are the two governments-supported organizations that buy mortgages from lenders and then sell them to investors through Wall Street. If a lender wants to sell its loans to Fannie Mae and Freddie Mac, they must ensure that those loans meet the minimum guidelines established by those organizations.
What does this have to do with employment requirements for mortgage loans? Everything. You can expect mortgage lenders to follow the guidelines set forth by the secondary mortgage market. That's where some of the documentation requirements we discussed earlier originate. They come from Fannie and Freddie.
A non-conforming loan, on the other hand, is a mortgage loan that does not meet the guidelines established by Fannie Mae and Freddie Mac. During the housing boom, there were plenty of lenders offering a variety of non-conforming mortgage loans. But not anymore. While there are still some lenders offering them, their numbers have dwindled greatly.
So if you want to qualify for a mortgage in 2011, you will want to meet the minimum employment requirements we discussed earlier. If you've been continuously employed for at least two years, and you can document this, you should be okay in this area.
Exceptions to the Rule, Revisited
I mentioned earlier that there are exceptions to most mortgage requirements. This applies to employment histories as well. Lenders prefer to see a continuous history of employment for at least two years. If you have any gaps in your history, it could hurt your chances of getting approved for a loan. But if you can explain those gaps, and the circumstances that created them, you might still get approved.
Here's an example...
Let's say I've worked for a software company for seven years continuously. One of the founders of the company branches off to start a sister company, and he wants me to come with him. But there's a small period of time where I'm technically unemployed by both companies. This could create a gap in my employment history. If you just looked at this on paper, it might seem like a negative thing. It would appear that I don't meet the employment requirements for a mortgage loan. But if I explained the situation to a mortgage lender, it almost seems like continuous employment. This is the type of situation where an exception might be granted.
I would also like to point out that these guidelines change from time to time. At the start of this article, I pointed out how dramatically the employment requirements for mortgages have changed over just the last few years.
So will all of this still be accurate two or three years from now? Who knows? This article was written in March of 2011, but it may be less applicable in March 2015. I don't expect mortgage requirements to get any easier in the near future, but they could certainly change in some way. So be sure to take this information with a grain of salt. There are exceptions to every rule. If you want to find out if you meet the employment requirements under the most current mortgage guidelines, you should contact a lender or broker.
Second Jobs, Overtime, Etc.
If you work two jobs, you would probably want to use the income from both jobs on your mortgage application. This could help you qualify for a larger loan. But the two-year rule applies here, as well. In order for your second job to count toward your overall income, you must have held that job for at least two years.
Let's say I've been working for company 'A' for the last five years, and I started a second job six months ago. In this scenario, the lender probably wouldn't allow me to use the income from the second job to support my loan application. They may only count my income from company 'A.' But if I've held both jobs for over two years, I would benefit from the combined employment history and income. Both would be allowed in the mortgage-underwriting process.
The rules about using overtime as part of your income are somewhat cloudier. Most lenders will count overtime toward your total income, but only if it's a regular part of your pay structure. For example, if you get overtime on a weekly basis for working weekends or extra hours, the lender will probably count that toward your income. But if you've only had overtime two or three times in the last year, it probably won't be counted. When in doubt, ask your lender about it.
Requirements for Self-Employed Borrowers
For the most part, the employment requirements are the same for self-employed borrowers seeking a mortgage loan. Here again, the two-year rule usually applies. You must have held your self-employed position continuously for at least two years. Some lenders may be a little more strict with self-employed borrowers, requiring you to have a longer employment history. But in most cases, the two-year rule of thumb applies.
As a self-employed borrower, you can probably expect some additional scrutiny in other areas as well. The lender may require a higher credit score or a larger down payment. It all depends on the amount of risk they perceive. They will probably ask you for tax returns for the last two years, or even longer. They may request a profit and loss (P&L) statement as well. The lender might want to see a balance sheet showing your financial debits and credits for the last year or two. It varies from one lender to the next. But you can probably expect additional paperwork hurdles, when compared to a person who works for a company.
Self-employed borrowers can improve their chances of getting a mortgage loan by doing the following:
- Achieving a higher credit score
- Saving up for a larger down payment
- Having plenty of cash reserves
- Minimizing other debt obligations
These things are not absolutely necessary to get approved for a mortgage loan. But they will certainly help your cause. If you already have excellent credit, a decent down payment and plenty of cash reserves in the bank, you might not need to do any of this "extra credit." But if you are weak in any of these areas, you should certainly try to improve it.
This article explains the basic employment requirements for mortgage loans in 2011. As mentioned earlier, these requirements change from time to time. We have made every effort to ensure accuracy when publishing this article. But there is a chance that certain portions may be less accurate by the time you read them. The requirements outlined above will likely remain in place for the foreseeable future. But there are exceptions to every rule. The only way to find out for sure if you qualify for a mortgage loan is to apply for one. You can do that through our main mortgage page.