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.

How Long do You Need to be Employed to Get a Car Loan?

This question was recently posed to me by a reader. It's a good one and brings up a few topics. First off, every loan application asks for employment status and history.

I asked the Coors Credit Union lending manager to give a general comment and this is what she said, "There is no minimum to apply. However it is preferred that an applicant has at least 6 months employment history, again preferably at the same employer."

But, the answer also depends on your situation and your credit score. You probably are aware of how important a good credit score is for qualifying for a loan and for getting a good rate, but employment can subtly affect your loan as well. Generally, lenders like to see consistent employment history of two years, but that doesn't mean others can't get a loan.

First-time buyers can get a better rate by waiting until they've been at a job for six months. For many first-time buyers the biggest hurdle is credit history. Often they just don't have much. You can qualify for a better rate and begin to build your credit by finding a co-signer. The loan will be yours. You'll make the payments and build credit history. However, if you can't make the payments your co-signer will be liable. If payments aren't made both of your credit scores will suffer.

Lenders look at numbers to determine risk. The higher the risk the higher your interest rate. Two things determine the risk level:

1) credit score

2) debt-to-income ratio

In some cases, you may be asked to provide proof of income. For example, self-employed people may need to provide documentation of income.

It is not impossible for unemployed people to get a car loan, however, you cannot claim unemployment benefits as income.

One thing to keep in mind when buying your first car, or any car, is that you are not locked into the rate you get. After a year your credit score could improve and if you stay with the same job your employment history will be more secure. At this time you could refinance your loan for a lower rate and possibly drop the co-signer if you have one.

Home Improvements Better the Economy

I have this my friend down the street that I'll simply describe as fiscally fortunate. For years everyone has been asking him why he doesn't move his family into a bigger house across town. His answer, "Why would I?" And now he's just finished remodelling his entire house, not to make it bigger, but to better suit his family. Is this smart during an economic downturn?

Oh yeah, this guy is very smart. He's living well in house that meets his needs within a smaller space and smaller mortgage. Sure he might be able to afford the bigger home, but he doesn't want to take a gamble with his good fortune.

And then there is my friend, Bob. He popped in the other day to chat and seek job references. He stops in every couple of months like this. He was finishing a basement down the street and wondered if I knew of anyone needing remodelling. Bob did our basement about 3 years ago. He did good work so we've recommended him to several other people. What was remarkable about this visit was that Bob said this is the first job he's had in six months.

"Really," I was surprised, but shouldn't have been I guess. But, I look down our street and see the wave of "For Sale" signs that have sprouted as they do every spring. Of course there are probably a variety of reason for the moves. But I'd bet that not everyone needs to move.

Loan rates on home equity loans and lines of credit are really good right now. Selling a house, however, is tough. Improving your existing home could save you money and add to the value of your home. And just think, you might even get a better price for your house sometime in the future.

Remodeling projects, or the lack of have an affect on the overall economy. When people like Bob are unemployed so is his assistant, his electrician, the plumber, the carpet layer, the painter and the tiler. Then when these people are out of work they're not ordering supplies and the suppliers aren't restocking their inventory and the factories produce less and layoff workers. Conversely when Bob and his team are working everything starts rolling again. The whole thing is interconnected.