When you’re ready to buy a home, you will find a common theme throughout the mortgage process.
It’s the number 2 – over and over again.
To qualify for a mortgage, a lender needs to see that you have two years of employment and two years of income. To verify both, you are required to produce two years of W2s and two years of tax returns.
Additionally, you must have two years of commission, overtime and bonuses to count them toward your income.
Why all the 2’s? A two-year period shows the lender you are consistent and stable financially. You demonstrate the ability to go to work, maintain a job, pay your bills and live within your means.
In that way, the lender also can feel confident in your ability to repay the loan. A mortgage is a financial risk for lending institutions. Before one will give you, for example, $250,000, it needs to trust you will make regular payments, no exceptions.
Here are several questions clients often ask me related to the two-year rule.
I’m self-employed. How do I show a two-year work history?
Lenders will require you to provide your full tax returns, personal and business. After analyzing the documents, they will determine how much of your income can be used to qualify for a home loan.
I haven’t been in a new job for two years. Can I still qualify for a mortgage?
If you have remained in the same line of work from your previous employer and your income structure remained the same (e.g., stayed a W-2 employee), there should be no problem. But if your income structure changed (e.g., you switched from being an hourly wage employee to a commission-only worker), then the lender will want to see a history of two years of receiving that commission-only income.
If you recently graduated and are employed in the same line of work for which you received a degree, then your education can be considered part of your employment history.
I have a second/seasonal job. Can I use the income to qualify for a mortgage?
If you have held a similar job in the same industry for the past two years and your income from that second/seasonal job is consistent, then the lender can use it to qualify for a mortgage. The lender will require documentation like verification of employment. If the job is seasonal, (e.g., camp counselor), then the lender will also need to confirm with the employer that there are reasonable expectations that you will be rehired for the next season.
Remember: when qualifying for a mortgage, it’s all about the 2’s.
Featured photo: Chris Glass (Flickr)