When you’re in the process of buying a house, there are a lot of moving parts. You have to find the right property, secure financing, negotiate with the seller, and coordinate a closing date. In the midst of all of this, it’s not unusual for people to change jobs.
Most people change jobs at some point during their working lives. But if you’re in the process of buying a house and applying for a mortgage, a job change can complicate things. Your income and credit score are two of the most important factors considered by lenders when approving or denying a mortgage application, so it’s important to be aware of the risks associated with changing jobs. It can impact your ability to get approved for a loan or could mean you have to pay a higher interest rate.
Here are some of the main risks to keep in mind if you’re planning to switch jobs while buying a home.
#1 Employment Instability
Mortgage lenders like to see stability, and if you’re in the process of buying a home and you suddenly lose your job, it can raise some red flags and put your entire purchase at risk. Additionally, your income could change if you switch jobs, which could affect your ability to afford your mortgage payment.
Lenders may require you to reapply for a loan with new employment verification, and if you’re unable to provide it, they may deny your loan or ask for additional collateral. Changing jobs can also lead to a loss of benefits, such as health insurance, which could increase your overall costs and make it more difficult to stay on top of your finances.
Here are a few things you can do to mitigate this risk, though:
- If you have an offer letter from your new employer, be sure to include it with your loan application. This will show the lender that you have a firm job offer and help to offset any concerns they may have about your employment situation.
- Be prepared to explain any gaps in employment on your application. If you have a good reason for changing jobs, such as taking a better position or relocating to be closer to family, the lender may be more understanding.
#2 Negative Impact on Credit Score
Lenders use credit scores to assess borrowers’ risk of defaulting on a loan, and a high credit score indicates that a borrower is less likely to default. A low credit score, on the other hand, could result in a higher interest rate or even cause a lender to deny the loan altogether.
Switching jobs while buying a house can negatively impact your credit score. When you change jobs, your income may change, which could make it harder to qualify for a loan. Therefore, it’s important to keep your credit score in mind when changing jobs during the mortgage process.
#3 Difficulty in Securing a New Mortgage Loan
In a mortgage application process, the lender will want to know that you’re in a stable position before approving you for a mortgage loan. A job change can lengthen the mortgage approval process, so be patient and stay in communication with your lender. Changing jobs can also delay the closing process. If your new employer requests a background check or employment verification, it could delay the closing so it’s important to time any job changes carefully.
Job changes that could impact your mortgage approval process
While a new job may offer better pay and benefits, it can also negatively impact your home-buying process. This could delay your purchase and cause frustration and financial stress. Here are a few scenarios to avoid if you don’t want your mortgage application to be denied:
1. Quitting your current job before starting a new one. Lenders like to see stability, so applying for a mortgage without a job lined up is generally not a good idea. This can be interpreted as a sign that you’re not confident in your ability to repay the loan, and it could lead to your application being denied.
2. Changing industries. Starting a new job that is in a different field or industry from your current one can be seen as an irresponsible career move and may make lenders question your ability to repay the loan.
3. Taking a pay cut in your new job. This will lower your income level and may make it difficult to qualify for the loan amount you need.
4. Relocating for a new position. Accepting a new job in a different city could also impact your mortgage approval process. Lenders will want to make sure that you’re still employed and that the move won’t impact your ability to make your mortgage payments.
5. Starting your own business or becoming self-employed. Self-employment income can be more difficult for lenders to verify. As a result, you may need to provide additional documentation, such as tax returns or bank statements in order to get approved for a mortgage. Your lender will likely require a higher down payment and may request a personal guarantee from you.
6. Changing jobs and your new employer doesn’t offer medical benefits. Lenders typically want to see that borrowers have medical insurance in case of an unexpected illness or injury.
7. Moving from a salaried position to an hourly position. Your lender will likely require a two-year employment history in order to qualify you for a loan.
#4 Failure to get the best interest rate
Mortgage interest rates are based in part on how long you’ve been employed, so if you switch jobs mid-way through applying for a loan, you may not get as good of an interest rate as someone who has worked at their current job for a longer period of time. Lenders may have to re-evaluate your loan application, and this could lead to higher interest rates or even a rejection of your loan.
Forfeiting of the Home Purchase Contract
One of the main risks of changing jobs while buying a house is that you may forfeit your purchase contract. When you’re under contract to buy a home, the seller usually requires that you maintain employment during the loan approval process. If you change employment, it could jeopardize your loan approval and cause the seller to cancel the contract.
In another case, when your new employer requires you to relocate, this could cause you to forfeit your deposit and all other money that you have paid toward the purchase of the home. Moreover, changing jobs may also impact your ability to get a mortgage. Lenders typically like to see at least two years of employment history, so changing jobs may make it difficult to qualify for a loan.
Tips for Staying on Top of Your Mortgage Application While Changing Jobs
Applying for a mortgage can be a stressful process—made even more complicated if you’re changing jobs before buying a house or during a mortgage approval process. Here are a few tips to help you stay on top of your mortgage application while changing jobs:
- Be upfront with your lender about your job situation.
Lenders need to feel confident that you have a steady income in order to approve your mortgage application. Trying to hide that you’re changing jobs will only make the process more difficult and could lead to your loan to be denied. So, if you’re changing jobs while buying a house, have a written offer from your new employer before quitting your current job. Lenders like to see stability and a steady income, so having a job offer in hand will help to ease their concerns.
- Have your financial documentation in order.
Changing jobs can sometimes mean changing employers; it can be challenging to track-down financial documents. Assemble everything you need before starting your mortgage application to avoid any delays. This includes things like tax returns, pay stubs, and bank statements.
- Get pre-approved for a mortgage before making the switch.
If you know you’ll be changing jobs during the mortgage application process, make sure that you get pre-approved for a mortgage. That way, you’ll understand how much you can afford to spend on a new home and won’t have to worry about your loan being denied because of a job change.
- Choose a stable job with good earning potential.
Provide your new employment contract to your mortgage lender to ensure that your income has not changed and that you can pay your mortgage schedules. It will help them feel more confident about approving your loan. Be prepared to explain any gaps in employment. Lenders will want to know why you left your previous job and how you plan to support yourself during the transition.
- Keep your housing costs low.
Another factor in getting approved for a mortgage is your debt-to-income ratio—that is, how much of your monthly income goes towards debts like credit cards and student loans. If you can keep your housing costs low while changing jobs, it will go a long way towards getting approved for a loan.
- Don’t make any major changes to your finances.
Avoid making major changes to your finances like opening new credit cards, taking out loans, or making large deposits into your bank account during the mortgage application process. Any changes to your financial situation could delay or even derail your mortgage application.
- Ask about a 40-year mortgage. If you’re concerned about being able to afford your mortgage payments, ask your lender about a 40-year mortgage. This plan allows you to spread your monthly mortgage payments out over a longer period of time, which can make them more manageable.
Overall, changing jobs during a mortgage application isn’t necessarily a deal-breaker, but it can complicate the process. It’s important to weigh all these factors and speak with your lender frist before making any decisions about changing jobs while in the midst of buying a house. By understanding the risks upfront and how these factors could impact your loan application, you can make more informed decisions about when—and if—changing jobs is right for you. Contact our real estate experts at Homes by Ardor so we can help you map out a plan that will keep you on track for homeownership.
Kris Reid is the CEO of Ardor SEO, a company that helps real estate professionals get more leads and customers to predictably grow their business.
Over the years, Kris acquired extensive knowledge of SEO and its practical applications in various industries, with the main focus on real estate.
In 2021 Ardor launched the Icons of Real Estate Podcast to share proven strategies from the top producing icon agents with the real estate community.
After obtaining the real estate license in 2022, Kris joined eXp Realty and launched Homes by Ardor, the platform that was built to be the fastest way to buy or sell a house. Homes by Ardor also provides leads for its partner companies and realtors.