Mortgages require the lender to verify the last two years of a borrower’s employment. While there is no specified time that a borrower must be employed (with exceptions for self-employment, commission income, and passive income such as investments), the borrower must demonstrate income stability. Often lenders will confuse income stability with job stability. Job stability, while certainly very desirable from a lender’s perspective, is not a requirement for a mortgage loan, while income stability must exist for a loan approval.
While income stability and job stability sound very similar, there are differences. Job stability indicates that the borrower has been on the job long term (typically greater than two years). When this occurs, the borrower has demonstrated both job and income stability. Income stability occurs when the borrower has steady income over a period of at least two year regardless of the number of jobs that have occurred during that time. Some low-moderate income will move between multiple jobs over a period of time, however, they are moving from job to job and their income is typically stable or increasing. The borrower has income stability, because even though there were multiple jobs, the income remained. This is becoming more prevalent as a result of the “gig” economy.
Because of the outdated standards of job stability, of which staff may not be aware, lenders who are not careful, may deny a loan which could be approved. Beyond the loss of revenue loss and the costs associated with a denied loan, there exists the possibility of regulatory, reputational, and litigation risk for the lender.
From a regulatory standpoint, if the lender has a pattern of denying low-moderate income borrowers due to lack of job stability, it could be considered disparate treatment based on sources of income. Even worse, for lenders who quantify job stability as part of their requirements of approval, it could result in a disparate impact claim. The reputational risk and litigation risk flow from this idea of disqualifying borrowers based on the number of jobs held within a specified time rather than denying a file for lack of income stability.
As mentioned previously, a borrower who has had multiple jobs over a period of time, may not be disqualified from mortgage approval just because of the multiple jobs. However, a borrower who is unable to demonstrate income stability, cannot be approved for a mortgage loan. An example of income instability occurs when a borrower has gaps of time (typically greater than 30 days) between jobs and the borrower has had no income during those gaps. This is not acceptable.
There are exceptions to this when the borrower can demonstrate that the reason for the gaps in employment were beyond the control of the borrower. For example, a borrower who is laid-off from a company due to a downturn in business may have a gap in employment for a period while they are looking for a new job. Once the new job has been started and the borrower has passed any probation period that may be required by the employer, the income is considered stable.
However, for a borrower who either terminates their employment voluntarily and does not follow on to another job within 30 days, this is considered income instability. Another example is for employment that is terminated by the employer for cause (firing). This is reviewed closely and the borrower must document that their current employment situation is stable (typically at least 6 months on the new job).
One other item of note, even if a borrower has income stability, not all forms of income may be acceptable for qualifying purposes. Certain types of income such as investment income, bonus, overtime, and commission always required a full 24 months of verification and must be from the same employer.
The rules for job stability and income stability are complex and can be confusing. For more information, contact The Commonwealth Group suggests a third-party review of your current underwriting policies and procedures to verify compliance. Contract West Beibers at The Commonwealth Group for more information at either firstname.lastname@example.org or by phone at 901-413-6999.
The Commonwealth Group – Consultants to the Mortgage Industry