Thursday, July 16, 2009

How long do need to be employed to qualify for a home loan?

The quick answer to this reader question is that it is preferred to have at least 2 years employment history. But getting a mortgage isn’t quite that cut and dry.

As we all know lenders have been hit hard with blame for the recession. They’ve been required to be more stringent in lending and have become much more cautious. Your income history is one of the best measures they’ve got to ensure that you’ll be able to make your monthly payments, though it still a risk on the lenders part.

Before mortgage lenders can grant you a loan, they of course would like to make sure you can repay them. They’ll need to know:

  • your credit history
  • your gross income each month
  • the amount of money you plan to use as a down payment

The Debt-to-Income Ratio Explained
A big part of the lender’s concern is your debt-to-income ratio. There are two calculations used to determine this number:

Front-End Ratio
This calculation determines how much of your pretax income will go towards your monthly mortgage payment. The mortgage payment figure includes interest, principle, taxes, and insurance and typically should not go over 28% of your gross monthly income.

Annual Salary x 0.28 / 12 (months of the year) = Maximum Housing Expense

Back-End Ratio
This calculation determines the amount of your total gross income that will go to pay all of your other obligations, including the mortgage, other loans, child support, credit card bills, and any other monthly debts. The figure should not exceed more than 36% of your gross income.

Annual Salary x 0.36 / 12 (months of the year) = Maximum Allowable Debt-to-income Ratio

Different lenders will have different requirements for the debt-to-income ratio. For instance, conventional loans — typically a conventional loan from a bank or other mortgage lender — will require no more than 26% to 28% of month gross income for housing costs and not more than 33% to 36% of monthly housing plus debt costs. With an FHA loan, the housing costs should not exceed 29% of the monthly gross income and 41% of the monthly gross income.

And it’s not impossible for self-employed people to get a loan. You’ll just need to show not only that you were gainfully employed, but also what your net income was compared to business expenses. Self-employed people will also need to show a profit-loss statement. If you don’t keep good records of legitimate business expenses, don’t have your taxes professionally prepared, and guesstimate your profits and losses, the loan process could come to a halt very quickly for you.

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