Change Jobs
So you've decided that you are at a stage in your life where you can buy a home or, if you're already a homeowner, upgrade your living conditions by buying an even better home. Once this decision is made, there are now a number of things that you have to do. The first, and most obvious, being finding a home that you want to buy. Open houses and appointments to look at available homes for sale are the most common methods to identifying a home that you want to buy. After this, there is a negotiation stage where you and the home seller will bargain over the appropriate selling price for that home. Although this can be a tense experience, the next step to buying a home is, arguably, more difficult.
Once you and the home seller have agreed on an appropriate selling price, the next step to buying a home is acquiring financing. Unless you have thousands of dollars at your disposal to buy a home outright, which most homebuyers do not, you will have to acquire a home loan from a lender. Regardless of who your loan source are, there are a number of important acts that you should not do as they can jeopardize your obtaining of housing financing.
Why Not To Change Jobs
One such action is changing jobs.
Although changing jobs may seem to you to be a personal decision that should not impact on your attempt to obtain a loan, the fact of the matter is that changing jobs will have an impact on your personal financial situation. As your personal financial situation is usually the main factor in whether or not you are approved for a loan, changing a job can have negative impacts on your attempts to buy a home.
In order to understand the possible impact that changing a job will have on your attempt to obtain a home, it is important to understand how the loan approval process goes. Once you have submitted your loan package for approval, your lender will review the loan application and investigate a number of financial factors before making a decision on whether your loan package will approved or not. The most important factor that the lender will examine is the source of your financial funds. The reason why this is important is because lenders want to be assured that you will be able to pay for the costs in buying a home that isn't covered by mortgage financing. These costs include the down payment (the part of the home's purchase price that the buyer pays for independently of a mortgage source) and the closing costs (the services and fees that the homebuyer and home seller pay for, which are incurred during the transfer of property ownership.)
For the vast majority of the home buying population, their source of income comes from their jobs. Consequently, by changing jobs, your lender will have valid concerns about how this will affect your source of income. Considering the vast amount of money that is supplied through a mortgage loan, your lender will have justifiable reasons for rejecting your loan proposal on the grounds that you are financially risky.
Example
To further illustrate this concern, read about what happened to Pat Kane, a successful copywriter based in Boston, Massachusetts who had finally reached the financial capability to pay for a home. Although Pat enjoyed his financial freedom and the line of work that he was doing, he also was wondering how he was going to employ his god given ability to take fantastic sports photos within the copywriting sphere.
Despite his career confusion, there was one thing that Pat knew he wanted. He wanted to buy a home. After several years living with his friends from university, Pat Kane had tired of their oafish ways and decided he needed to make a grand statement about his maturity and his financial stability. Deciding that he needed a change, Pat decided that he would transfer within his company to their offices in Minneapolis, Minnesota. After locating a fantastic loft in the heart of downtown Minneapolis, Pat applied for mortgage approval from a loan source.
Sure that his loan package would be approved, Pat Kane soon moved to other issues in his grand scheme to reorganize his life. At this point, he noticed that there was a job opening for a small sports photography company that was based in Minneapolis. Seizing this opportunity, Pat quickly applied for this position and soon received news that he had the job.
Excited about the opportunity of starting a new job in a new city while living in the first home he would ever own, Pat was in a state of bliss for weeks. Unfortunately, Pat soon received a phone call from his lender stating that his mortgage application had been denied. Deflated, Pat asked why and soon found out that he had tried to achieve too much at one time. By changing jobs, Pat was considered to be a financial risk and was to have his loan application rejected at this point in time.
Before you start feeling too bad for Pat Kane, you should know that this Pat Kane doesn't really exist but is rather a saying among those in the real estate industry for changing jobs while you are applying for a home loan. For example, if you have applied for a mortgage application and had been rejected because you have decided to change jobs from a lawyer to a painter, a real estate agent would say that you had just been kaned-Pat Kane-d!
But of course the Pat Kane rule does not apply to everybody. For instance, if you have applied for a mortgage before receiving a promotion at your job, understand that accepting this promotion will have no negative effects on your home loan application. If anything, it would only enhance the chances of it being approved.
Therefore, to understand the effect of changing jobs on your goal of buying a home, we will break down how a job change will affect people working under different conditions:
Salaried Employees
For individuals whose incomes are based on salary earnings and do not earn additional income from commissions, bonuses, or over-time, changing jobs will have minimum effect on whether or not your mortgage application will be approved. Although most lenders will prefer that you are staying within the same industry, the main determiner in changing from one salaried position to another will be whether or not you will receive an increase in your income. If you do, chances are higher that you will qualify for a mortgage.
Hourly Employees
For individuals whose incomes are based on hourly wages, changing jobs should not be a problem. As long as you work forty hours a week without overtime, the source of income will remain consistent. Unless you are leaving your existing job for another job that pays significantly less, your mortgage application should not be effected by your change of jobs.
Commissioned Employees
For individuals whose incomes are heavily based on commissions, changing jobs will have a negative impact on your ability to buy a home. This is because mortgage lenders calculate the income of clients that are commissioned employees based on an average of their commissions over the last two years.
By changing employers, you will immediately wipe away your track record of commissions. Consequently, lenders may label you a financial risk due to the absence of commission statistics at your new job that they could use to create a projection of your future earnings from commission. Regardless of whether you get a new job working within the same industry on a commission structure that is essentially the same as your last job, the mortgage underwriter (the person responsible for approving or rejecting mortgage applications) cannot be completely sure that your earnings at your previous job will accurately reflect future earnings.
Therefore, it is recommended for prospective homebuyers who are commissioned employees to not change jobs until you have bought a home.
Bonuses
For homebuyers who are considering moving to a job that uses bonuses as a significant portion of the income, it is recommended that they accept this job after they have bought a home. This is due to the way in which mortgage lenders review a prospective client's source of income. Unless a person has been at a job that uses bonuses as a substantial portion of payment, mortgage lenders rarely consider future bonuses as income. After two years of showing that you receive these bonuses at the same job, a mortgage lender will average the bonuses awarded over the last two years as a way to calculate your income.
Consequently, if you are about to change jobs to a position which relies heavily on bonuses, you should be aware that by changing jobs, you will be negatively affecting your chances on a mortgage approval.
Part-Time Employees
For those individuals who earn an hourly income but do not work forty hours a week, it is recommended that you should not change jobs while your mortgage application is being analyzed. This is because, if you were to change from one part-time job to another, your lender will have no way to calculate your future income. Due to the variations of hours that you will work each week on the new job, the lender cannot come up with an accurate way to project future earnings.
However, by remaining on your existing part-time job, the lender will be able to calculate your income by averaging your earnings.
Over-Time
For those individuals who are looking to change jobs to a position where much of your income will be awarded through overtime, it is recommended that you stay at your present job until you have purchased a home. Considering how there is not one set standard among employers about how to award overtime hours, it is difficult for a lender to factor in overtime earnings into a prospective client's future income levels.
Unless you have been at the same position for at least two years, it is very rare for lenders to give credit for overtime income. However, for clients that have stayed at the same position for at least two-years, a lender is able to give credit for overtime income. They do this by calculating a monthly average of overtime earnings based on your total overtime earnings over the last two years. By changing jobs, your lender will be unable to calculate and project overtime earnings. For most people, overtime earnings make up a large portion of their total incomes. Consequently, losing that portion of their income during a loan application causes serious jeopardy over whether or not their loan proposal will be accepted.
Self-Employment
If you have decided that you want to leave your job in order to create your own business, there is only one piece of advice we can give you: don't. If you are applying for a mortgage loan and decide to become self-employed, you are essentially guaranteeing that your loan application will be rejected.
This is because lenders will only accept self-employed client's applications after they have been self-employed for at least two years. A lender is able to look at a two-year track record of self-employment income as a way to measure a client's financial stability, which will be the basis of whether or not that client will have their loan approved. In addition to this two-year minimum requirement, lenders are wary of the way self-employed individuals include a lot of expenses on the Schedule C of their tax returns. This is a popular strategy among self-employed workers as it reduces the amount of taxes that they have to pay to the IRS but it also reduces the amount of income they have to qualify for a home loan.
Therefore, buy the home before you embark on a journey of self-employment.
