Securing a mortgage for clients who have an employment gap
As a result of the pandemic, employment gaps and job changes may be even more common today. The good news? It's not a deal breaker.
Practically everyone loves buying a house. It's a fun, exciting and memorable time for people, and it makes the mortgage broker profession incredibly rewarding to be on the front lines of bringing that experience to fruition.
The part that people like the least, and potentially don't like at all? The role that you play as a broker—the process of actually getting the money needed to secure the house. You know, the "getting a mortgage" part of buying a house, especially if they are having to overcome an employment gap.
Homepoint account executive Brook-lyn Hibbs gives 4 tips on how mortgage brokers can advise clients who may be dealing with employment gaps so they can feel confident in their ability to buy that house they really want.
1. Employment gaps are okay, but varying levels of consistency are needed
If a prospective homebuyer is angling to get an FHA Loan, it's okay if they had been out of work longer that six months in the past year, as long as they can show they have since been employed for a solid six months prior to ordering an FHA number assignment. For example, if your client was out of work from July 1, 2020 through January 1, 2021, they can qualify for an FHA loan once they can show they were back on the job from January 2, 2021 through July 2, 2021.
Conventional loans, as well as VA and USDA loans, have more leniency depending on the circumstances surrounding the gap in employment. There are a lot of compensating factors that an underwriter will look at, such as a borrower's cash reserves, their intended down payment, and their credit score.
Payment shock is a big thing. If someone is transitioning from living with their parents for free (or very little rent) to entering the market as a first-time homebuyer where they could have a $1,200 or $2,000 monthly mortgage payment, lenders want to understand their overall situation to see if it can work for them.
2. Document the borrower’s story up front
If a borrower is trying to obtain a mortgage in the midst of a multi-month employment gap, it's beneficial to have them write and provide a strong letter of explanation as to why. They should tell their story and accurately paint the picture for the underwriter who is reviewing the file.
Were they temporarily laid off because of the COVID-19 pandemic? Was it related to a medical leave of absence? Did they take time off to pursue a new career or to be a caregiver at home and now they're looking to get back into the workforce?
It's best if they are up front about it from the get-go. If you don't help them document their situation, they are essentially licensing an underwriter to create their own story about your client—and that may not work out in anyone's favor.
3. Different ways to meet the two-year benchmark
Ideally, lenders are looking for a two-year history of employment when considering loan applications. Prospective borrowers should let you know every job they've had. It's important for them to make sure their application is completely filled in. If they were at Employer A for six months, then moved on to Employer B, and even ended up at Employer C, all during a two-year span, we want to know that.
Job-hopping isn't necessarily a deal-breaker. Ideally, a borrower would be able to showcase stability and longevity in their current role, but that again points to the importance of them clearly articulating their story—both to you and to the underwriter reviewing the file. For homebuyers who are recent college graduates, university transcripts can apply to that two-year history.
Another factor that is considered is how a borrower is paid—whether it's hourly, salaried, commission-based, and so on. Based on agency guidelines (Fannie Mae and Freddie Mac), it can be difficult for commission-only workers, who have only been on the job for a few months, to provide the assurance required.
4. Engage your Wholesale Account Executive early
Your Wholesale Account Executive wants to help you navigate complicated employment history and gaps. Brook-lyn advises her brokers to contact her early to discuss specific situations—before the loan is submitted. She can review the specific situation and provide insight and guidance that will help save time and ensure underwriting gets the details they needed.
Just because someone's employment history might not meet the "cookie-cutter" perception that they, or you, have of the perfect loan applicant, doesn't mean they can't get the home they want. The most important thing is that every borrower gets in touch with a mortgage broker and you contact your Homepoint account executive, so we can together, identify the best solution for your client.
Watch the full interview with Homepoint Account Executive Brooky-lyn Hibbs.
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