Are you considering relocating to a different area or another state? Lower cost of living, a better quality of life, or to be closer to family. Whatever the reason, Americans have been relocating at an increased rate since the pandemic. With housing much cheaper in many areas, it is easy to dream about what life would be like. If you need a mortgage on a new home, a key consideration in your plans should be how to qualify for the loan. Each circumstance is unique, but two of the most common concerns are income continuation and qualifying with other obligations – like a currently owned home.
Income continuation is a bedrock issue for the loan industry. Lenders are legally required to document income and the likelihood of continuance to support your ability to repay a loan. There are loan programs available without these considerations, but the rates and costs will be higher than if we can fit into a “normal” loan. This piece is designed to get you info on how to get the best loans.
Income can be categorized into two rough categories, either active or passive. Passive income, like social security, pension, dividends, trust income, rental income, alimony, and child support, is typically considered stable. Most importantly, a location change will not disturb your ability to receive income. If these are your only sources of income, then you have a leg up in relocating and getting a loan. Active income, typically from a job or self-employment source, must be verified that it will continue. We’ve detailed some specific circumstances. You most likely fit into one of these categories.
“I quit my job, and I’m leaving town!” This may be obvious by now, but if you leave employment without a replacement job, the income cannot be used to qualify you.
New Employment (Salary)
We can use income from a new salary or full-time hourly job with an offer letter from the new employer. You don’t need to be on the job to qualify for most loans.
New Employment (Overtime, Bonus, Commission)
Using commission and/or bonus income at a new employer gets tricky. First, we need to document that you’ve received any of these variable income sources over the last 24 months. For example, you cannot start a new job with commission earnings and expect to use that income early in your new job unless you have a history of that type of income at your prior work. A good example of solid history would be a salesman changing car dealerships.
Next, to use this income, you would have had to receive it from the new employer. If your commissions take 3 months to ramp up or your bonus is paid only annually, we won’t be able to use either for qualifying until you have been paid on it. If this is a small portion of the income, it may not be a big deal, but if you are primarily getting a commission, bonus, and OT, it should be a significant consideration.
We need one of two things. Either we obtain documentation from your employer (such as a letter) that you can work remotely and live anywhere, OR we document the new location you are working at.
Self-Employed, New Location
In this situation, we need substantial documentation supporting that you can work from anywhere or that your business can operate unaffected without you. We typically do this with a short letter from you. For example, if you run a location-based delivery business in Los Angeles and are relocating to Nashville, you would need to state that the day-to-day operations don’t require you to be there (i.e., you don’t drive the trucks).
Self-Employed, Getting Hired
If you have been self-employed but then get an offer of employment in a different location, we can use that new offer immediately.
Starting a New Business
This one is hard. Nearly every type of loan will require a history of being self-employed for at least one year to qualify. The best programs require the most recent year’s tax returns to show the income. Some programs, like FHA, VA, and Jumbo loans, will require two years of being self-employed and two years’ tax returns showing the income.
Every situation is unique. You may need only some of your income to accomplish your plans. We highly recommend chatting with an expert to confirm that your goals are on track.
The other consideration that occurs has to do with your current home. If you are renting, there is nothing to consider. However, if you own the home you currently live in and it has a loan owed against it, there can be additional obstacles. The timing of buying, selling, or renting your home is all a key factor, as in some circumstances, you’ll be qualifying for two properties at once. Each program may also have different rules, so guidance is critical here.
Selling First, then Buying
This is the easiest option from a loan standpoint. We simply need to document that the prior obligation is closed when you sell the home.
Buying First, then Selling
This is usually ideal for buyers. Still, it is harder to qualify for as most lenders consider that unsold home an additional obligation, even if you are in escrow to close it. You may have enough income to qualify for the new loan, even with the old one outstanding. There are down payment considerations to account for here as well. A good loan officer can make a considerable difference in creating options in this situation.
Buying and Renting Your Departing Home
In some cases, this is easier than buying first and selling. Many programs allow us to use the rental income from the departing home to cover its expenses, erasing the qualifying obligation. You’d need a lease agreement starting after you move out, and not all lenders/programs allow us to use that income. For example, many Jumbo loans (over $726K) don’t allow said rental income. This could be an excellent way for your to acquire additional property. Having a home to move back to in case the grass is not greener is solid planning too!
Working with a trusted mortgage professional to hear your goals, help you plan, create loan options for you, and deliver on those commitments is critical. Please call or schedule an appointment. We’re licensed in CA, TN, TX, FL, and ID. We’ll help you to put the puzzle pieces together and give you sound guidance.