Buying a home is a priority for many people -- a rite of passage into adulthood. Homeownership is the opportunity to build equity and personal wealth, plus it provides a measure of stability. But although some hope to purchase their own place, there are hurdles to homeownership.
You might have a job and earn a decent salary, but these factors aren't always enough to qualify for a mortgage loan. Banks don't play when it comes to financing. They have strict lending guidelines, and if you can't meet the mortgage requirements, you can't get a loan. And unfortunately, your employment choices can stop your home loan approval.
Whether you're buying another home or thinking about buying your first place, here are a couple of things you should know about mortgage approvals and employment choices.
Perils of Self-Employment
Self-employment can be the path toward financial freedom. You can set your own hours, work at your own pace and control your income. And you might be the envy of those in your circle. However, the joys of self-employment might come to a screeching halt when you're ready to apply for a mortgage loan.
Because lenders are cautious, they scrutinize every applicant's income and employment record. And while being self-employed can generate a nice income for your family, it's also common for self-employed people to write-off expenses to lower their taxable income. This is beneficial from a financial and tax standpoint, but it can harm your chances of qualifying for a mortgage.
A good accountant knows how to maximize deductions to reduce how much you owe. But if you're self-employed, mortgage lenders will determine affordability according to your income "after" write-offs. For example, if you earned $60,000 last year, but you taxable income was only $30,000 after write-offs, a lender will give a mortgage based on the smaller number, which can significantly reduce buying power.
For that matter, if you're planning on buying a home in the near future, limit your number of write-offs for the next couple of years.
Employment Gaps Can Be the Kiss of Death
Unfortunately, many conventional mortgage lenders require two years of steady employment. This can be a major hurdle if there are gaps in your employment history, or if you're just entering the workforce after graduating college. This rule might seem extreme, but it's for the bank's protection. A steady work history indicates stability, which is what banks look for in a mortgage applicant.
Also, if you're self-employed, you'll need at least two years of tax returns to qualify for a mortgage, plus a year-to-date profit and loss statement.
Changing Jobs Before Closing on the Mortgage
If you've found a home and the bank has scheduled your closing date, do not quit your job or change employment. A mortgage pre-approval does not guarantee a loan. The process isn't finalized until after signing the loan documents at closing.
A change in your employment status might not ruin your chances of closing on the mortgage, but it can delay the process. At this time, the lender will have to contact your new employer and verify your income to determine whether you still qualify for financing.
It's a big step, and one false move can delay your plans of ownership. Do your research to familiarize yourself with lending requirements. And if you're unsure as to whether a decision will harm your chances of getting a home loan, speak with a mortgage lender for advice.