Do I qualify for a home loan? Part 1: Stability
This is one of the first questions someone asks themselves when homeownership enters their mind. Rightfully so! Buying a home is a big decision with an intense process from beginning to end. Finding someone to partner with you to help you finance the home is no easy task. This article will highlight the three different parts of qualifying for a mortgage.
The uniform residential loan application (form 1003) is the foundation of your loan and providing 100% accurate information is the most important thing. Essentially, the underwriter that reviews and approves your loan will be looking at the most recent two (2) year history of where you've lived and worked.
You'll need to provide the company name, physical address you worked at, job title, income amount, pay frequency, phone number, and start/end dates. If you work remotely, you'll need to provide the address of the office you report to.
Many people wonder if it is okay to have multiple jobs during the last two years. Gaps in employment of 60 days or longer require explanation letters to be submitted along with your documentation, so having these prepared beforehand will save you time. You may have reason to worry if you are receiving less pay than before, hold a demoted title, or have long gaps without reasonable explanation.
There are some key things to keep in mind here:
It is OKAY to be self-employed and change to being an employee (W2) with less than two (2) year history
It is *NOT OKAY to be W2 and change to being self-employed with less than a two (2) year history.
It is OKAY to have a side-hustle and include the income, as long as it is reported on the most recent tow years' tax returns. Be cautious when preparing to buy a home and showing losses on your tax return! It may negatively impact your qualifying amount!
It's OKAY to have two jobs as long as you have had a two year history of consistently working at two places. You cannot have any gaps.
It is OKAY to be unemployed for certain loan programs. There are loans that can help homebuyers that do not have a source of income, but have plenty of documented assets. Other products, like the reverse mortgage, provide a source of non-taxable income from your equity each month**. Some loans tailored toward investors also allow you to qualify without using your personal income.
It is NOT OKAY to receive income if paid by cash, UNLESS, it is being reported on your tax return as income. (PRO TIP: Make sure all your funds needed for closing are set aside in an account and are seasoned for 60 days!)
*Exceptions can be made if you were in the same line of work. Certain loans allow for self-
employed borrowers with less than a two-year history (Physician loans).
**Must be 62 years or older to qualify.
Living rent free may not disqualify you from owning a house. Someone living rent free doesn't pay rent for their housing situation. Some mortgage loans have payment shock, which is the difference between how much your proposed payment will be versus what you are currently paying. Most loan programs tailored toward first time homebuyers will usually allow this.
Temporary living situations can be tricky when you don't have mail being delivered or the address where you are staying reflected on your paperwork. Typically, temporary living situations don't come with paperwork (i.e. contracts), which can be problematic when paper-trailing your residency. Crashing on a friend's couch while you transition from renting to owning is not uncommon. Repeat buyers are sellers that are upsizing, downsizing, relocating, divorcing, marrying, etc. At times, transitioning from selling a home to buying the next home may fall on different days which requires temporary living situations. All things considered, don't let that prevent you from looking into buying.
Leases extending past the purchase date can come up during the application. If you've been at a new residence for less than twelve months (12), you may be asked to provide proof you've turned in your notice to vacate or a copy of the lease. I've seen many renters upset at their landlords that come with the intention of breaking the lease without paying and that will most likely end up being problematic. Save yourself the trouble, prepare adequately, and honor your contract. That's the behavior the bank will be looking at. If you can't honor a 12 month contract, how are you going to honor a 30 year contract? Think about it.
Living in multiple places isn't usually planned for. In some instances, like if you're in the military, you'll be transferred as needed. This doesn't disqualify you, but it will probably require some sort of explanation and documentation proving your claim. EVERYTHING must be supported by documentation. Leaving behind a trail of broken leases will not reflect well with the underwriter.
Vacating a home you own and converting it to a rental property is also common. Many starter homes become rental homes once the owners grow out of the house. Why wouldn't you want to have someone else pay off your mortgage while your home sits there and appreciates?
I hope this provided you with insightful information and I encourage you to share this post with anyone you know that is asking the question, "Do I qualify for a home loan?"