Income And Employment History

Mortgage lenders need to follow income and employment history standards set by mortgage lending 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 and the second set of standards are the guidelines set by the lender’s own internal mortgage lending overlays.  Overlays are additional rules and guidelines on top of the minimum federal mortgage lending guidelines set by the mortgage lender.  For example, maximum debt to income ratios set by FHA mortgage lending guidelines is 56.9%, however, a particular mortgage lender may have their own internal mortgage 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 a mortgage loan applicant to qualify for a 3.5% down payment FHA purchase loan, however, a particular FHA mortgage lender may require a FHA mortgage loan borrower to have a 640 minimum FICO credit score.  Just because a residential mortgage loan applicant does not qualify with a particular mortgage lender does not mean that he or she does not qualify with another mortgage lender.  There are mortgage lenders, like myself, who have relationships with wholesale mortgage lenders with no mortgage lender overlays.  As long as you have an automated approval via DU FINDINGS and/or LP FINDINGS, you will get a mortgage loan approval as long as you can verify all of the information you have stated on your mortgage loan application and can provide all the information DU FINDINGS and/or LP FINDINGS requests.  Income and employment history is the most important factor when it comes to qualifying for a residential mortgage loan.  You can have bad credit but as long as your income and employment history requirements meets mortgage lending guidelines, you can get a residential mortgage loan.  However, if you have perfect credit but cannot meet income and employment history qualification requirements, there is no way you can qualify for a mortgage loan unless you have a qualifying non-occupant co-borrower who is a relative or family member.

Income

There are certain ways mortgage lenders qualify income when it comes to mortgage loan 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 the mortgage loan underwriter.  There are strict rules and regulations when it comes to 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, and other income.  Here are the general income requirements to qualify for a residential mortgage loan and the types of incomes we can use:

1.  W-2 income:  Hourly and salary income.  If you are a full time hourly wage earner, your income will be based on a 40 hour work week and your monthly gross income will be used to qualify your income.  If you are a salaried wage earner, your annual salary divided by 12 months will be used as your gross monthly income.  Your deductions from your tax returns will be deducted from your monthly gross income.  If you are an hourly wage earner and you do not work a full 40 hour work week and your hours vary, then your past two year’s W-2s will be averaged and so will your year to date income and a verification of employment will be required.

2.  1099 income:  If you are an independent contractor, self-employed, or 1099 employee, then two years of tax returns will be required.  If your current year is higher than the previous year, then the two year tax returns adjusted gross income will be averaged.  If your most current year income is less than your prior year 1099, then the lower of the year gross adjusted income from your tax returns will be used and divided by 12.   If you are a 1099, then two years of 1099 and tax returns will be required for you to qualify for a residential mortgage loan.  Under certain circumstances, can one year tax returns be used.  Freddie Mac allows for one year tax returns only if you are a strong borrower.  A strong borrower is a mortgage application with a larger down payment, higher credit scores, reserves, and compensating factors.

3.  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 and the overtime is likely to continue for the next three years. 

4.  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 and the part time income will continue for the next three years.

5.  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.

6.  Social security income:  Social security income can be used and can be grossed up by 25% if the social security income recepient gets a net check from the Social Security Administration.

7.  Pension income:  Pension income can be used and can be grossed up by 25% if the recepient gets a net check.

8.  Disability income:  Disability income can be used and can be grossed up by 25% if the recepient 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.  You can have gaps in employment to qualify for a residential mortgage loan.  For example, say you worked on your current job for one year but prior to that, you were unemployed for three years.  Well, we will need your employer prior to your unemployment period.  For those who have been in school and do not have a two year employment history, that is alright.  Your years in school can be used in lieu of employment.  For example, if you never had a job in your life because you were in school and just got a full time job, your two years in school can be used in lieu of your two year’s employment history.

How Underwriters View Gaps In Employment

If you have been unemployed for six months or shorter, and just got a new job, then you need to provide 30 days of paycheck stubs in order for you to close on your mortgage loan.  If you have been unemployed for more than six months, then you need to be on your new full time job for at least six months in order for you to qualify for a residential mortgage loan.

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

If you have been a 1099 wage earner for many years and just got a job as a W-2 wage earner, then you only need to be on your new job for 30 days in order to close on your residential mortgage loan.  However, if you have been a W-2 wage earner for many years and have now changed to a 1099 wage earner, you now need to wait 2 years in order to qualify for a residential mortgage loan.

Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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