You know mortgage lending is a tad too tight when even a guy like Ben Bernanke, who ran one of the most powerful banking systems in the world, can’t get a new loan.
But Bernanke’s denied refinance on his $815,000 Washington D.C. home recently had little to do with his income or credit history. Most likely, his application was rejected by an automated system that took exception to his recent job change, which is considered an indicator of a high-risk lender.
If you’re about to change jobs like Bernanke, while also in the market for a new home, have no fear.
Luckily, simply changing jobs or pay structures doesn’t rule out a mortgage for you if you’re ready to be upfront with lenders and are prepared with key paperwork. With these few tips for planning ahead with a new job prospect, you can cinch up a mortgage or refinance better than Bernanke could.
Lenders are wary of borrowers changing jobs because they can’t make an easy case for their income’s future based on their current income. They just don’t have as much paperwork to back-up their financial stability.
Especially high risk to lenders? Borrowers who have gaps in their work histories, borrowers who have changed careers and borrowers who have changed their pay structure — say, from salaried to commission. They’re all tagged steeper credit risk even if they’re earning more.
Lenders are wary of borrowers changing jobs because they can’t make an easy case for their income’s future based on their current income.
But don’t be tempted just to sit out of the market for a bit and rent until you have more history in your new job position. Think carefully about a rental decision because these days, buying is increasingly cheaper than renting, according to a recent Trulia cost-comparison analysis.
Nationally, buying a home with a 30-year mortgage is about 38% cheaper than renting, up from 35% cheaper than renting a year ago, driven in part by lower interest rates and rising rent rates. The buying advantage goes for all but one of 100 major metropolitan areas that Trulia analyzed.
So, instead of putting the more affordable home-buying on hold, why not navigate around employment status challenges? All it takes is a little leg work.
Give Lenders Heads Up on New Job Prospects
First, if you expect to change jobs during mortgage application process, tell your lender upfront so they can work with you on the requirements. As you ease into the new job, send any new documents to your lender as soon as possible. If you sign a new job contract, forward it right to your lender. If you get a new compensation package, send it over to your bank.
You’ll have to notify your lender of any material changes, including job changes, at the very close of settlement anyway, so the earlier you alert you lender to them, the better.
Step-Up the Paperwork Preparation
While having your paperwork ready is good practice for any borrower, it’s especially important for those with income and job changes.
Lenders need to see proof of income. So if you have a new job, those first pay stubs are especially important to have on hand to show you can continue to meet your bank’s income requirements.
Also, lenders frown upon irregular, unpredictable earnings, no matter how high the payments. To put their mind at ease, gather as much of your previous irregular income stream together and try to calculate trends and averages that will help your case that you actually have a steady, reliable income.
Employer Recommendation Letter
Finally, try to get a letter from your new employer stating what they expect you to earn and their thoughts on the security of your job. A move from a salaried position into a commissioned-based pay structure will be less threatening to lenders who hear from an employer that workers in other positions regularly draw healthy paychecks.
Even a letter saying your employer expects you to stick around for a while shows helps, too. Employer-vouched job security is probably something Bernanke didn’t have after he left the Fed.
Perhaps, if he had, he would have landed that mortgage.