When you apply for a mortgage to buy a home, lenders will scrutinize many aspects of your finances to gauge whether you can handle those hefty monthly payments. They’ll check how much income you’re earning, of course, but they’ll also probe deeper by assessing your stability of income. So what is stability of income? This is an evaluation of how dependably you can continue to bring in the amount of money that you are currently earning.
Along with your credit score (your track record of paying off debts), “stability of income is the main criteria that lenders use to assess a potential buyer’s qualification for a mortgage,” says Bill Golden, an Atlanta-based Realtor®.
Of course, lenders don’t have a crystal ball pinpointing when you’ll get that raise or if layoffs are on the horizon. Instead, like with your credit score, they will presume that your past and present situations are a decent predictor of your future. If they spot anything suspicious, they may ask for an explanation, so it’s best to have a good response ready. So here’s what mortgage officers scrutinize and the best way to respond.
Gaps in employment
Mostly, lenders want to see a consistent work history—namely, that you’ve been working for at least two years. If you have more than a one-month gap in your work life, underwriters will want to hear a good reason why. Perhaps your work is seasonal or you took maternity leave, or suffered an illness or death in the family. Whatever the reason, a lender may ask you to explain the gap in a letter.
Also be prepared to back up your explanation with paperwork. If you left a job to pursue an MBA, you may be asked to produce a university transcript. Or if you took medical leave due to a health issue, you may be asked for documentation from your doctor. (Be aware that it is illegal to deny a pregnant woman a mortgage.)
Frequent job changes
Changing jobs frequently isn’t necessarily a bad thing in the eyes of a mortgage lender. Silicon Valley workers, for instance, are often hopping from one tech company to another.
What lenders want to see is that you’re moving up, not just moving. You’ll have to prove that the new jobs were advancements, came with more money, or offered better benefits like matching 401(k)s.
The key point is that lenders want to know that your income will at least stay the same, not necessarily that the same employer is paying that income.
Probability of continued employment
Lenders will also try to divine how likely you’ll stay in your current job or, if you leave, what the chances are that you’ll find employment elsewhere. Are you in a hot industry, offering a service everyone needs, or are you holding out to be the last switchboard operator in town? Your longevity in the field, education, and experience matter as well.
Consistency is key: If you’ve been with the same company for 15 years, lenders typically accept that tenure as an assurance that you’ll probably work there a while longer. But if you’ve been working for a company for just one year, that doesn’t mean you’re damaged goods. In that case, a lender may ask for a letter from your boss saying what a great employee you are and how great it would be if you stay there forever (or at least well into the foreseeable future).
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