When you apply for a mortgage, the lender wants to know that you can and will repay your loan. Your credit rating represents your willingness to repay. Your income represents the ability to repay.
This is why employment plays such a large role in the mortgage application process.
Underwriters check out the jobs you’ve had in the past, the job(s) you hold today, and the job you may hold in the future. They want to make sure you have a plan for your career — and that your plan is working.
Remember that, in general, a first-time home buyer lacks the employment depth of an experienced home buyer. A first-time home buyer may be fresh out of college or graduate school or could be just a year or two into his or her career.
The two-year rule
It’s typical for lenders to consider your last two years of employment. That does not mean you must have been conventionally-employed during those last two years.
Of course, there are the really easy cases.
For example, if you were a staff accountant in the software industry, and changed jobs to be a staff accountant in the medical field, that would be considered an acceptable lateral move by a lender.
Then, there are the unconventional but acceptable histories.
Suppose that you spent the last four years completing an accounting degree, and worked a couple of temporary accounting jobs during the summer. Upon graduation, you got a full-time accounting position.
The fact that you’d only been working full-time for a year probably won’t hurt your mortgage approval chances.
However, a ten-year employment history won’t help if you spent a year as an accountant, switched to bartending for a couple of years, and then started up a multi-level marketing gig. Now, you’re a personal trainer with six months in the business, and that’s just not a reliable track record.
In general, your lender just wants to make sure that your household income is stable, and will be ongoing for a period of at least three years.
How long must you be on the job to qualify for a mortgage?
As with many things in mortgage lending, the answer is “it depends.”
For instance, there are different requirements for conventional (like Fannie Mae) and government-backed loans (like FHA).
In fact, your work history might make you decide to change loan types. For instance, getting an FHA loan with less than two years employment is easier than qualifying for another loan type.
Following is a breakdown of what each loan type requires.
|Loan Type||Employment Length Required|
|Conventional||Two years of related work or educational history|
|FHA||Two years of related history. Need to be at current job 6 months if applicant has employment gaps|
|VA loans||Two years or relevant schooling or military service. If active military, must be more than 12 months from release date|
|USDA||No minimum in current position; prove 2 years’ work or related history|
Conventional loans with less than two years employment
Two years of employment history is recommended, according to Fannie Mae, the lead conforming loan rule-making agency. (Freddie Mac, the other mortgage rule-setter, has very similar guidelines.)
However, it also says that less than two years is acceptable, provided the applicant’s profile demonstrates “positive factors” to compensate for shorter income history.
What are these factors? Education is a great one. For instance, you have a four-year degree in the field in which you now work. That education almost always counts as work history. New grads typically have no problems qualifying despite a brand-new job.
If you recently changed jobs and changed fields, try to tie them together with a great letter of explanation. Present a case why this new job is just a continuation of your previous one. What skills did you build there that you now are using?
Keep in mind that the above only applies to salaried, full-time work. You’ll likely need at least two years of reliable income if you mainly earn bonuses, overtime, commission or self-employment income. And if you take on a second, part-time job for extra earning, you’ll need a two-year history for lenders to consider it.
FHA loans with less than two years of employment
FHA is more lenient about work history. Its guidelines state that previous history in the current position is not required. However, the lender must document two years of previous employment, schooling, or military service, and explain any gaps.
If an extended gap is present, the applicant must be employed in the current job for six months, plus show a two-year work history prior to the gap.
The FHA lender examines the probability of continued employment. That means verifying past work or education history.
FHA lenders want to see that you are qualified for your current position and that you are likely to remain in that position or a better one in the future.
Don’t worry if you have changed jobs frequently in the past two years. This is acceptable as long as each job change was an advance in your career.
Write a letter explaining how each move benefitted your situation — more money, more responsibilities, a company with more opportunity.
As with other loan types, FHA requires two years of documented history of overtime, bonus, and other variable income.
VA loan employment history requirements
VA loans allow you to qualify with less than two years of employment. The lender documents your work history and requests proof of relevant schooling or military service
These loans are tougher if you have less than 12 months of employment total (including all jobs). The VA lender may request the probability of continued employment from your current employer.
Additionally, lenders examine past training or relevant experience. The VA requires that the lender prove that an applicant has the needed skills for the current job.
For active military servicemembers, VA lenders consider income stable if the applicant is further than 12 months from his or her release date.
USDA loan qualification with less than two years of employment
USDA mortgages offer many benefits, such as zero down payment requirement and credit score flexibility. And they are also very lenient about employment history.
According to guidelines, there is no minimum length of time applicants must work in their current position before applying for the mortgage.
The applicant must document work history for the previous two years. It’s okay if he or she has moved around between jobs. However, the applicant must explain any significant gaps or changes.
If you are a USDA applicant, you must document that you were working toward or obtained a degree via college transcripts during the gap. Or prove your military service with discharge papers.
Both of these factors help satisfy your work history requirement.
While you can qualify for a USDA loan with a new job, you must prove that your current position is stable, so that you can make your mortgage payment long-term.
How much income do you need to get a mortgage approved?
To get mortgage-approved as a first-time home buyer, it’s not just your job that matters — your income matters, too.
However, the methods most mortgage lenders use to calculate income can put first-time borrowers at a disadvantage. This is because first-time home buyers don’t often have the work history that an experienced buyer possesses. As a result, not all income may be counted as “qualifying” income.
Check out the common scenarios below. If you have questions about how your particular income would fit into the loan approval process, be sure to ask your lender.
|Type of income||Years history required|
|Salary||Can use full amount immediately, with offer letter or first pay stub|
|Bonus||Two years’ history required|
|Commission||Two years’ history required if more than 25% of income|
|Overtime||Lender will average two years’ OT earnings|
|Hourly||Preferably, two years’ average will be used if hours fluctuate|
|2nd job||Two years’ history of working both jobs simultaneously|
When you earn an annual salary
When your income is an annual salary, your lender divides your annual gross (before tax) income by 12 months to determine your monthly income.
In general, you do not need to show a two-year history — especially for jobs which require specific training or background.
When you earn an annual salary, plus a bonus
When you bring home an annual salary plus a bonus, your lender calculates your income in two parts.
First, your lender divides your annual salary by 12 months to determine your monthly income.
- Salary: Lender considers your full, current annual salary
- Bonus: The lender averages your actual last two years’ bonus income
If you have received bonus income for at least two years, and the employer indicates that bonus income will continue, lenders can consider it “qualifying” income.
Underwriters normally divide your last two years of bonus income by 24 months to arrive at a monthly total.
However, as with any income, if lenders see that it has been dropping year-over-year, they may choose to discount or even ignore this income.
When you earn an hourly income
Typically, lenders multiply your hourly rate by the average hours you work. The table below shows Fannie Mae’s guide to income calculations.
|How Often Paid||How to Determine Monthly Income|
|Annually||Annual gross pay / 12 months|
|Monthly||Use monthly gross payment amount|
|Twice Monthly||Twice monthly gross pay x 2 pay periods|
|Biweekly||Biweekly pay x 26 pay periods / 12 months|
|Weekly||Weekly pay x 52 pay periods / 12 months|
|Hourly||Hourly pay x average number of hours per week x 52 weeks / 12 months|
Erratic work hours or recent job changes ca harm your income calculation.
Those with little work experience, who also earn hourly wages can experience difficulty when applying for their first mortgage.
When you earn overtime pay
When you earn wages plus overtime pay, your lender totals your prior two years of overtime pay and divides by 24. That’s your qualifying overtime pay.
Again, if the extra pay declines over time, the lender may discount it. And without a two-year history of overtime pay, your lender will probably not allow you to claim it on your mortgage application.
When you earn commission income (25 percent or more)
When you earn at least 25 percent of your income from commissions, your base income is the monthly average of your last 24 months of income.
If you have less than 24 months of commissioned income, your lender probably can’t use it for qualifying.
There are exceptions. For instance, if you work for the same company, doing the same job, and earning the same or better income, a change in your pay structure from salary to fully or partially commissioned might not hurt you.
You have to make the argument, however, and get your employer to confirm this.
When you are self-employed
When you are self-employed, mortgage lenders require at least two years of verified income. They then use a complicated form to determine your “qualifying” income. But understand that your gross revenues (before deductions) is not the figure that lenders use when calculating your qualifying income.
Lenders have been known to make exceptions on this rule — specifically, for recently self-employed persons who have started a business in a “related field.”
It’s not uncommon today for employees to continue working for the same company, switching to “consultant” status, which is self-employment, but getting the same or more income. These applicants can probably skirt the two-year rule.
What are today’s mortgage rates?
When you’re buying a home for the first time, you may not have the work experience of a seasoned borrower, but that doesn’t have to affect your ability to get mortgage loan approved.
Get today’s live mortgage rates now. You don’t need to provide your social security number to get started, and all quotes come with access to your live mortgage credit scores.