So, you’re ready to apply for a mortgage. To make yourself a more attractive borrower to lenders, you’ve taken on a part-time job to boost the income from your full-time employment. But here’s some bad news: That part-time income might not help you qualify for a larger mortgage. Most mortgage lenders will ignore this new income if you can’t prove that it’s here to stay. After all, your mortgage is likely for 30 years and you may have only had that part-time job for three weeks!
The truth is, you’ll generally have to rely only on full-time, consistent income streams (the money you earn at your full-time job, any rent that you collect each month, alimony, regular payments from legal disputes) when you’re trying to prove to lenders that you can afford a mortgage.
The Debt-to-Income Ratio Requirement
To qualify for a mortgage, you’ll need to hit certain debt-to-income ratios. In general, lenders want your total monthly expenses – including the estimated amount of your new monthly mortgage payment – to equal no more than about a third of your gross monthly income, your income before taxes are taken out.
This is known as your debt-to-income ratio. And if it’s higher than about a third, you’ll likely struggle to gain approval from most mortgage lenders.
If you’re struggling to remain under that level, you can either reduce your expenses or boost your monthly income. That’s why borrowers often think that taking on a part-time job can help them overcome their debt-to-income hurdles.
Why Your Job Status Matters to Lenders
If you want lenders to count your part-time income, you’ll have to first prove that you have held this work for a length of time – like at least two years.
Say you earn $60,000 a year from your full-time job and you want to buy a large home that requires a large monthly mortgage payment. To boost your income, you take on a part-time job at your local supermarket that gives you an extra $1,000 a month. This gives you $12,000 more a year in income, right?
Not necessarily. Before they count this extra money, lenders will require you to provide paycheck stubs, tax returns or contracts documenting that this part-time work isn’t something that you just picked up a month or two ago. Even though in general lending standards aren’t as strict as they once were, lenders have to make sure that you can afford your mortgage payment each month. If you lose your part-time job two months after you start paying back your mortgage loan, your lender might have to deal with missed payments and possibly an eventual foreclosure.
The Bottom Line
Lenders can’t guarantee that any part-time job (or full-time job for that matter) will be forever. But by approving borrowers who have a substantial history of earning money, lenders figure they are increasing the odds that they’ll get paid on time.
So if you planned on using part-time income to prove that you’re ready for a mortgage, it’s time for a dose of reality: That extra income stream might not be any help at all… at least when it comes to qualifying for a mortgage.
Tips for Buying a Home
- Make sure your credit score is in good shape. With a high credit score, you can get lower mortgage rates, which translates to lower monthly mortgage payments.
- Talk to a financial advisor about how buying a home will factor into your larger financial plan. Especially if you’re unemployed and not bringing in a regular income, you want to ensure you can purchase a home without sacrificing your other financial goals. A matching tool like SmartAsset’s SmartAdvisor can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to up to three registered investment advisors who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.
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