Yes, you read the headline correctly and no it’s not a return to the dizzy days of nonchalant loan approvals. In fact, it is a return to the days when lenders were able to employ a bit of common sense underwriting where a lender could approve a mortgage application even though the applicant was in between jobs. But there are some caveats as you might expect but there are times when it does make sense to approve a loan application while someone is not actively employed or in the process of transferring to another job but just not quite there.
The Consumer Financial Protection Bureau, or CFPB, introduced some very important guidelines in an effort to shore up the lending industry. One of these referred to a new term called a Qualified Mortgage, or QM. If a lender approved a loan using QM guidelines the lender would be protected against any future litigation from a borrower relating to the mortgage. One of the provisions relating to QM includes verification the borrower has demonstrated an “ability to repay” or an ATR standard. This is verified when the lender verifies the total monthly credit obligations, including the mortgage payment, property taxes and insurance, do not exceed 43% of the borrower’s gross monthly income. But if someone is not currently employed or switching jobs how does the lender attain QM status and the important protections it provides?
The Offer Letter
First, it needs to be made clear that a borrower cannot get a loan with providing verification of income. If someone is out of work with no clear prospects of employment the applicant can’t get an approval. There must be income in order to calculate debt ratios and without income there can be no ratio calculation. However, there are guidelines being used today that can address temporary unemployment or a job switch.
When lenders verify employment they ask for recent pay check stubs covering a 30 day period. Lenders will also forward a Verification of Employment letter to the employer confirming not only whether or not the applicant actually works there but for how long and if the employer anticipates the employee to continue working there in the future.
The pay check stubs will not only show gross monthly income along with individual withholdings but also year to date income as well. This verification process allows the lender to make the QM determination.
If there is no current employment but there is future employment the lender can refer to a letter from the future employer certifying future employment, pay and start date. In recent past it was mandated the employee must provide a pay check stub showing income as well as a 30 day period. There had to be a pay check stub. Period.
Consider someone who is changing jobs and moving to a new city. The lender is aware of the employment status of the borrower but can’t calculate ratios because there are no pay check stubs. There is no third party document such as a pay check stub from the future employer because the future employee has yet to report. An acceptable offer letter from the future employer can work as long as the letter contains specific information.
The letter must be on the future employer’s letter head and provide:
• A letter signed by both parties stating the offer is bona-fide and not contingent on any external event
• The new job must start within 90 days of closing on the new loan
• The letter must include the gross monthly income
• The property must be a primary residence and a single family home including a condominium unit
• Cash reserves verified to include at least three months of mortgage payments which also include principal and interest payment, property taxes, insurance and mortgage insurance if applicable. These reserves are to be applied to the 90 day gap of closing on the new loan
• The loan amount is at or below the local conforming loan limit
These new, actually revived, standards now mean someone doesn’t have to rent an apartment or find a place to stay and wait for a 30 day pay check stub. Remember there are times when an initial pay check is delayed for one pay period which then means the applicant must wait longer than a 30 day period.
For recent college graduates who have yet to start a new job can now buy and finance a home with an offer letter instead of a new pay check stub. For employees who are simply being transferred to a new city and staying with the same employer there is no need for an offer letter yet a lender will want to verify the terms of the new position.
This also means that for those who are self-employed and are relocating to a new city won’t be able to use an offer letter because of their self-employment status. Lenders can also require a self-employed borrower to provide evidence of continued income similar to what was made in the previous city. For example, a dentist decides to move from Miami to San Diego and start a brand new practice. It’s obvious the dentist won’t have any existing patients and must develop the practice over time.
However, if the individual does have an offer from an employer even in another city and does have sufficient reserves to meet the requirements then a lender can proceed with a loan approval. It might seem a bit odd at first being able to qualify for a home loan in today’s lending environment to not be currently employed but it is a breath of fresh air when a lender can use common sense guidelines when evaluating a home loan application.
