Â I recently had a client that ran into problems while trying to buy
the home of their dreams. I decided to write a blog on the issue of
changing jobs before closing escrow so hopefully it will save another
potential home buyer a lot of headaches along the way. I always advise
clients that the most critical stage of the home buying process is from
the time that you put a home "under contract" until it closes and you
are handed the keys. Recently mortgage lenders have "tightened" their
lending practices since the collapse in the housing market. They are
scrutinizing loans more closely now than ever before. My advise is not
to change ANYTHING related to your credit or changes in employment (even
if it is a better paying job) until after the settlement date. Below
are things to consider before making a change in employment if you are
thinking about buying a home....Changing employers will not really
affect your ability to qualify for a mortgage loan for most people. For
some home buyers, however, the effects of changing jobs can be
disastrous to your loan application. Below are tips on avoiding problems
in the loan process...
Â Â If you are a salaried employee who does not earn additional income from commissions, bonuses, or over-time, switching employers should not create a problem. Just make sure to remain in the same line of work.Â Hopefully, you will be earning a higher salary, which will help you better qualify for a mortgage.
If your income is based on hourly wages and you work a straight forty hours a week without over-time, changing jobs should not create any problems.
If a substantial portion of your income is derived from commissions, you should not change jobs before buying a home. This has to do with how mortgage lenders calculate your income. They average your commissions over the last two years.
Changing employers creates an uncertainty about your future earnings from commissions. There is no track record from which to produce an average. Even if you are selling the same type of product with essentially the same commission structure, the underwriter cannot be certain that past earnings will accurately reflect future earnings.
Changing jobs would negatively impact your ability to buy a home.
If a substantial portion of your income on the new job will come from bonuses, you may want to consider delaying an employment change. Mortgage lenders will rarely consider future bonuses as income unless you have been on the same job for two years and have a track record of receiving those bonuses. Then they will average your bonuses over the last two years in calculating your income.
Changing employers means that you do not have the two-year track record necessary to count bonuses as income.
If you earn an hourly income but rarely work forty hours a week, you should not change jobs. There would be no way to tell how many hours you will work each week on the new job, so no way to accurately calculate your income. If you remain on the old job, the lender can just average your earnings.
Since all employers award overtime hours differently, your overtime income cannot be determined if you change jobs. If you stay on your present job, your lender will give you credit for overtime income. They will determine your overtime earnings over the last two years, then calculate a monthly average.
If you are considering a change to self-employment before buying a new home, donâ€™t do it. Buy the home first.
Lenders like to see a two-year track record of self-employment income when approving a loan. Plus, self-employed individuals tend to include a lot of expenses on the Schedule C of their tax returns, especially in the early years of self-employment. While this minimizes your tax obligation to the IRS, it also minimizes your income to qualify for a home loan.
If you are considering changing your business from a sole proprietorship to a partnership or corporation, you should also delay that until you purchase your new home.