Does job switching impact your mortgage application?

Are you considering buying a home but worried about how your job switching might impact your mortgage application? Don't let that stop you from reaching your homeownership dreams! 

With the job market constantly evolving and the rise of the gig economy, job switching has become a common occurrence in recent years. While it may seem like a red flag to lenders, there are ways to navigate the mortgage process and prove your stability as a prospective homebuyer.

What will a lender need to know about my job history?

When you're applying for a mortgage, your lender will definitely want to make sure you have — or can keep — a good job that will allow you to make your mortgage payments with no problems. Many prefer you to be at your current job for at least two years, but this varies depending on the lender's rules and your situation. 

Here are some things your lenders will evaluate: 

• Employment status: Lenders like stable jobs with steady incomes. If you're self-employed, do seasonal work, or have a history of frequent job changes, this may raise concerns. 
• Type of employment: Lenders may prefer certain types of work over others. For example, salaried positions are typically seen as more stable than contract or freelance jobs. 
• Length of employment: An history of longer stays at each employer suggests that you have a track record of holding down a job and will be a less risky borrower.
• Income and debt: To determine how much you can afford to borrow, lenders look at your debt-to-income (DTI) ratio, which measures how much of your income goes to pay down your debt (including the mortgage). A high DTI makes it harder to get approved. 

How do I explain gaps in my resume?

Gaps in your employment can be a red flag, so it's best to be honest and transparent about it on your mortgage application. Your lender will want to understand the reason for the gap and how you maintained your financial stability during that time. It's a good idea to prepare an explanation ahead of time, so you're not caught off guard. 

Possible explanations for employment gaps could include: 

• Taking time off to care for a family member 
• Pursuing additional education or training 
• Experiencing a temporary layoff or job loss 
• Taking a medical leave of absence 
• Starting a business 

Some lenders will require documentation to support your explanation, like:

• copies of any unemployment benefits or severance pay received
• proof of enrollment in a school or training program
• evidence of other income sources or savings tapped during the gap

If you're self-employed or have a history of freelance work, your lender may ask you to provide additional tax returns, financial statements, and other documentation. If this sounds like you, read our blog about getting a mortgage when you're part of the gig economy.

What if I switch jobs while my mortgage is underway?

Switching jobs during a mortgage application isn't necessarily a deal breaker, but you'll want to show that the change won't impact your ability to repay the loan. 

A job switch can also cause a delay since your lender may need to update your employment and income information. Delays can push closing dates which can mess with your closing costs, so keep your lender informed of the change as soon as possible. They'll want a signed contract or other documentation to confirm your new income and employment status. 

What types of job changes might be acceptable? 

• Getting a promotion or raise: Staying with the same employer while being paid more will improve your DTI and make you more likely to get a better interest rate, be allowed to borrow more or both.
• Stay in the same industry but land a new gig: Switching to a different position in the same field is fine as long as the new job pays similarly and is as stable as your last job. 
• New job, new field, same income: Taking a new job in a different industry? You should be fine if your pay hasn't taken a hit.

The rule is to avoid big changes to employment or income before applying for a mortgage. If you're deep into the mortgage process and a new job is in the cards, ask your future employer if they can wait to make it official until after you close.

Good to go?

Remember, every lender is different and may have additional employment and income not covered here. If your job status or salary will change soon, speak with your loan officer as early as possible to see how it may impact your application.