Employment History for a Mortgage Application
Your employment history includes calculating income and establishing continuity of employment.
There are a lot of moving parts when it comes to documenting employment history and income. Sometimes there are gaps of employment, involuntary layoff, relocation that need to be explained.
Working with an experienced mortgage professional, you should have no problem. If you get connected to a mortgage call center, or inexperienced loan officer, arming yourself with this information will protect you.
Stable and Predictable Income
Fannie Mae underwriting guidelines serve as the standard for establishing the industry tests for “ability to repay” a mortgage loan. In it’s simplest terms, a lender must establish the stability and predictability of your income. This is your “ability to repay.”
Examples of less predictable income sources include commissions, bonuses, substantial amounts of overtime pay, or employment that is subject to time limits, such as contract employees or tradesmen.
Having a hectic employment history does not mean you cannot qualify for a mortgage loan, it simply means that your lender is going to have to have the ability, and put in the effort, to put the story together in a way that meets underwriting guidelines.
2 Year Employment Rule
History of Receipt: Two or more years of receipt of a particular type of variable income is recommended; however, variable income that has been received for 12 to 24 months may be considered as acceptable income, as long as the borrower’s loan application demonstrates that there are positive factors that reasonably offset the shorter income history.
Determining the Need for Federal Income Tax Returns
Although it is a best practice to provide full tax returns anytime you itemize your deductions, your lender will require signed federal income tax returns filed with the IRS for the past two (or 3) years for the following sources of income or employment.
If you, the borrower:
- earns 25% or more of your income from commissions;
- are employed by family members;
- are employed by interested parties to the property sale or purchase;
- receive rental income from an investment property (only one year of tax returns is required unless you meet one or more of the other conditions in this list);
- receive income from temporary or periodic employment (or unemployment) or employment
- employment is subject to time limits, such as a contract employee or a tradesman;
- receive income from capital gains, royalties, real estate, or other miscellaneous non-employment
- earn income reported on IRS Form 1099
- receives income that cannot otherwise be verified by an independent and knowledgeable source;
- uses foreign income to qualify;
- uses interest and dividend income to qualify; or
- receives income from sole proprietorships, limited liability companies, partnerships, or corporations, or any other type of business structure in which the borrower has a 25% or greater ownership interest. Borrowers with a 25% or greater ownership interest are considered self-employed. The lender must document and underwrite the loan application using the requirements for self-employed borrowers, as described in Section B3-3.2, Self-Employment Income.
Top 3 Unusual Employment Exceptions
1. Self Employed to W2 – This is a very strange one indeed, only because if you turn this scenario around and go from being a W2 employee to self employed, you are subject to the strictest interpretation of the employment history rule.
If you were self employed, and are now working for someone other than yourself, and your employer takes taxes out of your check, you only need 1 paycheck from the W2 employer to meet the employment history requirement.
Self Employed to 1 month W2 is OK. W2 to Self Employed requires a 2 year history
2. Recently Discharged from Military Veterans are given credit for job duties while on active military when current employment requires the skills learned while on active duty in the military. In these cases, active duty can count toward history of employment requirement.
It is not uncommon for a veteran recently back from active duty overseas, to qualify with current employment even though it’s your first job after active duty.
3. Recently Graduated from Higher Education – Graduates with a college education, or completion of trade school and subsequent employment in the field of your educational expertise, are not always required to show a 2 year history of employment.
Using Nontaxable Income to Adjust Your Gross Income
Lenders may give special consideration to regular sources of income that may be nontaxable, such as child support payments. Social Security benefits or workers’ compensation benefits.
The lender must verify that the particular source of income is nontaxable. Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income.
If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender may develop an “adjusted gross income” for the borrower by adding an amount equivalent to 25% of the nontaxable income to the borrower’s income.
Have You Been Turned Down?
If you find yourself in a position where you still have questions after you’ve been turned down for a mortgage loan, it’s totally ok to get a second opinion.
A lender missing a guideline is rare, but it can happen. There is a human element to mortgage underwriting. In the event that it does happen, starting on the internet is a good idea.
Feel free to reach out and ask your questions.