Q: My husband is quitting his job to stay home w/our three small children (we have twins!). But in two years, we would like to move and have his new job’s salary considered when we apply for a loan. I heard he has to be working for at least six months for his income to be considered. Is that correct?
A: You and your stay-at-home-dad-to-be hubby exemplify the flexible family roles of a modern American family. Kudos to you both for thinking ahead and being strategic about the road ahead. Let’s get right to your questions:
1. Six months should work. Based on current guidelines, which are subject to change, most lenders require that a gap of employment longer than three months be followed up by at least six months of employment before the income of the borrower with the employment gap can be considered toward qualifying for the home loan.
Lenders will still require your last two years of income tax returns, but will generally look to your average monthly income from the last few months so long as they are provided with verification that your husband’s been back to work for at least 180 days.
2. There are caveats. The six-month greenlight assumes that your husband goes back to work in the same field as he worked in before he took time off to stay home with the kids. Most lenders have a two-year "same line of work" requirement; the employment gap doesn’t disqualify his income from counting, so long as he’s been in the same line of work for at least two years.
If your husband is looking to change lines of work, he will need to prove that he’s been in the field for two years before they will count his income. Time spent enrolled in an educational course does count toward the two-year "same line of work" requirement.
So, for example, if he was a firefighter, then went to law school during his employment gap, then went back to work as an attorney for six months, the time spent in law school would count toward the required two years in the legal field, and the six months of lawyer work would allow his income to count toward your qualifications.
If, on the other hand, he was a firefighter, took two years off, then went to work in human resources, he would probably need to work for two years in the HR field before his income would count toward your loan qualifications.
3. And a few more caveats. Assuming he’s going back to work in the same line of work as he was in before, the lender will likely use only his base salary to count toward your loan qualifications. Commissions, overtime, bonuses and other employment compensation beyond the base salary cannot be counted toward your ability to repay your mortgage without a two-year paper trail documenting the extra income. Similarly, if he goes back to work in his own business, he might be required to document his self-employment income via two years of adjusted gross income as shown on federal tax returns, for that income to be counted toward your loan qualifications.