Avoid the two-year rule
Two years of uninterrupted employment is one of the most important prerequisites for obtaining a home purchase loan.
But what if you've just started a new job or have recently changed jobs? This does not necessarily mean that you are excluded from buying a home.
According to mortgage advisor Ivan Simental, employment history is only part of the puzzle. If you can prove that you are a strong borrower – and not a risky bet for the lender – there are ways to bypass two years of employment. Here is how.
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Do you need a professional background to buy a home?
Technically, it takes two years of work to buy a home. This can make mortgage approval difficult for first-time home buyers or borrowers who have recently changed jobs.
The good news? There are a few ways to get around the two-year rule, Simental said on a recent episode of the podcast The Mortgage Reports.
"When a lender looks at your credit profile, they want to make sure that you can pay back the loan," he explained. "There are three main things to look at: your credit, your income – including your employment and assets – and what kind of down payment you have."
In other words, lenders look at the full picture of your mortgage application. So it is possible to make up for a shorter employment history with strong strengths in other areas, such as your creditworthiness or wealth.
The exact flexibility depends on your specific situation, including your career path, your loan program, and the lender you choose. Now let's dive into the details.
Who can buy a home without 2 years of work?
"If you have good credit and can invest a lot of money or have money in reserves but don't have a two-year job history, lenders can make an exception," Simental said.
The key to these exceptions is that lenders have "compensating factors" – or elements that (and a few others) compensate for a negative mark on your loan application.
Compensating factors include things like:
A very high down payment A great credit score A low debt-to-income ratio (DTI) A lot of cash in the form of savings or assets A new mortgage payment that would be equal to or less than what you are currently paying for housing
If you have one or more of these factors, Simental said, lenders will "consider you a responsible, risk-free borrower" and be more likely to approve your mortgage.
The most important thing is to be able to show that you can afford the monthly payments on your new loan.
Your bank statements, pay slips, tax returns or a meaningful letter of offer from a new employer can help – even if you don't have two years of professional experience.
Confirm eligibility to buy a house (August 16, 2021)
Mortgage approval is all about consistency
According to Simental, “two years” does not necessarily mean two years in the same job or even two years of professional activity.
Instead, lenders want to see consistency – that you have had some type of income for the past two years and will continue to do so after your loan is closed.
"If you've had multiple jobs in the past two years, but spent two years in the same industry or a related field, we still count that as two years of constant income," said Simental. “It doesn't have to be two years in the same job. It only has to be two years of continuous employment in the same or a similar area. "
It doesn't have to be two years in the same job. You only need two years of uninterrupted employment in the same or a similar field.
In some cases, schooling can also count as gainful employment. This is especially true for high-income professionals such as doctors and lawyers. Some new skilled workers can be admitted solely on the basis of a vacancy.
Even unemployment income, if earned regularly, can sometimes be counted towards two years of employment.
"Let us assume that in the last two years you worked six months, became unemployed for two months, worked again for six months and consistently for two years," said Simental. "We can then use this unemployment benefit as income because you have been continuously unemployed for two years."
According to Simental, this approach is common among gig, seasonal, and contract workers who may not have full-time jobs or a fixed monthly income.
Flexibility varies depending on the lender and loan program
The exact flexibility you have depends on your mortgage loan program and the lender you choose.
The employment rules by loan type are as follows:
With FHA loans and conventional loans, You need two years of professional experience and at least six months in your current jobVA loan require borrowers to have at least two years of employment, schooling, or military serviceUSDA loan ask for two years of work experience (although no minimum time is required in your current position)
The guidelines also vary depending on the lender as each company has its own requirements and risk thresholds. This is why it is important to start looking for a mortgage lender – especially if you are concerned about not qualifying.
"There are many lenders who can and will work with you," Simental said. "It's up to you to do your homework and research and find these lenders."
The final result? Don't give up if you're not approved right away
Finally, Simental said if you get turned down it doesn't mean you can't get credit elsewhere. So keep trying.
"Just because one lender says no doesn't mean another lender says no," he said on the podcast. "It all depends on the bank in their policies and how flexible they are with them."
So if you think you are eligible for a mortgage – whether you've worked in the same field for two years or have comparable education and work experience – apply to a few different mortgage lenders.
Not only could this help you get a permit, but it could also help you find the lowest interest rate and save money on your new home.
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