How Do Mortgage Lenders View Income And Employment History

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How Do Mortgage Lenders View Income And Employment History

This BLOG On How Do Mortgage Lenders View Income And Employment History Was UPDATED On Martch 11th, 2018

Mortgage lenders need to follow income and employment history standards set by mortgage guidelines.

There are two sets of income and employment history standards.

  • The first set is the federal mortgage lending guidelines pertaining to income and employment history
  • The second set of standards are the guidelines set by the lender’s own lending overlays
  • Overlays are additional rules and guidelines on top of the minimum federal mortgage guidelines set individual mortgage lenders
  • For example, maximum debt to income ratios set by FHA guidelines is 56.9%
  • However, a particular lender may have their own lender overlay on debt to income ratios capped at 45% debt to income ratio
  • Same with credit scores

Minimum Credit Scores Required To Qualify For Home Loan

FHA allows a minimum credit score for borrowers to qualify for a 3.5% down payment FHA Loans:

  • However, a particular lender may require a FHA borrower to have a 640 minimum credit score
  • Just because mortgage applicant does not qualify with a particular lender does not mean that they do not qualify with another lender with no overlays
  • There are lenders like The Gustan Cho Team at USA Mortgage with no mortgage lender overlays
  • As long as borrowers have an automated approval via DU FINDINGS and/or LP FINDINGS they will get loan approval as long as they can verify all of the information they stated on application
  • Also as long as borrowers can provide all the information DU FINDINGS and/or LP FINDINGS requests

Importance Of Income And Employment History

  • Income and employment history is the most important factor when it comes to qualifying for mortgage
  • Borrowers can have bad credit but as long as income and employment history requirements meets guidelines they can qualify for mortgage
  • However, if borrowers have perfect credit but cannot meet income and employment history qualification requirements, there is no way they can qualify for a mortgage
  • They can qualify for mortgage if they have qualifying non-occupant co-borrower who is a relative or family member with FHA Loans

Income

There are certain ways mortgage lenders qualify income when it comes to borrowers.

  • Cash income is non-existent in the mortgage industry
  • All income needs to be documented and will be verified with the Internal Revenue Service by underwriters
  • There are strict rules and regulations when it comes to the following income:
    • W-2 income
    • 1099 income
    • self employed borrowers
    • part time income
    • bonus income
    • child support income
    • alimony income
    • social security income
    • pension income
    • disability income
    • royalty income
    • other income

Types Of Qualified Income

Here are the general income requirements to qualify for home loans and the types of incomes we can use:

  • W-2 income: 
  • Hourly and salary income
    • Borrowers who are full time hourly wage earners income will be based on a 40 hour work week
    • Monthly gross income will be used to qualify income
    • Borrowers who are salaried wage earners, annual salary divided by 12 months will be used as gross monthly income
    • Deductions from tax returns will be deducted from monthly gross income
    • Borrowers who are hourly wage earners and do not work a full 40 hour work week and hours vary, then past two year’s W-2s will be averaged
    • So will year to date income and a verification of employment will be required
  • 1099 income: 
    • Borrowers who are an independent contractor, self-employed, or 1099 employee, then two years of tax returns will be required
    • If current year is higher than the previous year, then the two year tax returns adjusted gross income will be averaged
    • If most current year income is less than prior year 1099, then the lower of the year gross adjusted income from tax returns will be used and divided by 12
    • Borrowers who are 1099 wage earners, then two years of 1099 and tax returns will be required
    • Under certain circumstances, can one year tax returns be used
    • Freddie Mac allows for one year tax returns only if AUS states one year tax returns
    • A strong borrower is a mortgage application with a larger down payment, higher credit scores, reserves, and compensating factors
  • Overtime income: 
    • Overtime income can be used if the mortgage applicant has had consistent overtime income for the past two years in the same job
    • Overtime needs to likely to continue for the next three years
  • Part time income: 
    • Part time income can be used if the mortgage loan applicant can provide proof that they had worked part time for the past two years
    • Likelihood of part time income to continue for the next three years
  • Child support and alimony income
    • Child support income and alimony income can be used if the child support and alimony income is likely to continue for the next three years
  • Social security income: 
    • Social security income can be used and can be grossed up by 15% if the social security income recipient gets a net check from the Social Security Administration
  • Pension income: 
    • Pension income can be used and can be grossed up by 15% if the recipient gets a net check.
  • Disability income: 
    • Disability income can be used and can be grossed up by 15% if the recipient gets a net check

How Underwriters View Employment History

Two years employment history is required.

  • Two years employment history does not mean two straight years of work history
  • Borrowers can have gaps in employment to qualify for home loans
  • For example, say borrower worked current job for one year but prior to that were unemployed for three years
  • Lenders will require two year employment history prior to unemployment period
  • For those who have been in school, full time schooling counts the same as full time employment
  • Do not have a two year employment history if full time student
  • Years in school can be used in lieu of employment
  • For example, borrowers who never had a job in life due to being in school full time and just got a full time job, two years in school can be used in lieu of two year’s employment history

How Underwriters View Gaps In Employment

Borrowers unemployed for six months or shorter, and just got a new job, then all is needed is to provide 30 days of paycheck stubs in order for them to close:

  • Borrowers who have been unemployed for more than six months, then they need to be on new full time job for at least six months in order to qualify

Switching From 1099 Employee To W-2 Wage Earner And Vice Versa

Borrowers who have been 1099 wage earner for many years and just got a job as a W-2 wage earner, then they only need to be on new job for 30 days as a full time W2 wage earner to qualify for mortgage. Offer Letter Of employment is required by new employer. However, if borrowers have been a W-2 wage earner for many years and have now changed to a 1099 wage earner, they now need to wait 2 years in order to qualify for mortgage as a 1099 wage earner.

Gustan Cho

www.gustancho.com

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