As record numbers of Americans leave their jobs during The Great Resignation, a local mortgage lender advises homeowner hopefuls to consider the impact of changes in their employment on mortgage loan eligibility.
David Hall is president and CEO of Hall Financial, a mortgage brokerage founded in Troy in 2016 with a growing Grand Rapids location at 4949 Plainfield Ave. NE, Suite 100. The brokerage does business primarily in Michigan — with Grand Rapids being one of the hottest markets in the state — as well as in Tennessee, Florida and Virginia.
Hall said the growing national trend known as The Great Resignation, or The Big Quit — people leaving the workforce during the COVID-19 pandemic — comes while home prices are being driven up by short supply and high demand for homes, making this one of the trickiest times in history for homebuyers to find a place that meets their needs while also qualifying for a mortgage loan.
While no two scenarios are the same, Hall said certain factors generally have a negative impact on borrower eligibility.
“There are gaps in employment that make sense that are not a problem (such as someone going from one job to another); however, just one scenario — and I can point out a lot of them for you — is that for some folks who have decided to walk away from their current position and start their own business (self-employment), it’s very much a big issue in terms of being able to get a mortgage,” he said.
“In today’s day and age, with regulators very nervous about clients who are self-employed being able to sustain their business, you need a two-year history self-employed to be able to qualify for a mortgage, so that is a huge issue. When somebody goes from a position where they’re working as a W-2 worker, to somebody who’s starting their own business, they are not eligible to get a mortgage.”
An exception to this, he said, is if the person starting a business has a spouse or partner who makes a large enough salary to qualify for the home loan amount they’re looking for.
“In a scenario where, let’s say both spouses were making $75,000 and they needed both incomes to qualify, and then one went self-employed, they wouldn’t qualify anymore, but in a scenario where you only needed one spouse to qualify, that would work,” he said.
Quitting a job and going self-employed also would be a hurdle in qualifying for a Federal Housing Administration (FHA) loan or Veterans Affairs (VA) loan, Hall said.
“With self-employment, in and of itself, the rules have gotten very stringent, so much so that some companies have decided to not to do self-employed loans anymore because they’re that difficult to do in today’s day and age,” Hall said. “What you’ll find, talking to self-employed business owners in general about most of their experiences with a mortgage over the past 12 months, is they’re probably pulling their hair out because it’s become very difficult.”
Hall said the rules changed mostly due to the impact of COVID on small business revenues.
“Past income was no longer as much of an indicator of future income for a restaurant or somebody who owned a fitness center, where there was a serious issue with that kind of business,” he said. “Other businesses did well, but typically, what you’ll find the regulators in the mortgage industry will do is obviously when there’s more risks, they get nervous, and so to the degree that you were self-employed during COVID, the rules got a little bit more difficult.”
Those whose businesses are unaffected by COVID who want to get a home loan might be able to qualify, but they likely will need to provide more detailed financials to prove they are not a risk, Hall said.
In 2022 and beyond, Hall is hopeful that the effects of the pandemic on businesses will ease, and mortgage loan guidelines will become less stringent.
Hall said he understands many of the people leaving the workforce altogether are doing so out of necessity, due to child care shortages and health issues, but it’s important that the adult members of the household look at their financial picture, whether they already have a mortgage loan or would like to get a new one, to determine they can pay for what is likely to be any family’s largest expense by percentage of income.
He said a change in employment also can affect households that would like to refinance an existing loan.
“Let’s just say somebody is at 4% on their interest rate, and they want to refinance because they want to go to a 3%, or they want to take some cash out. If they change materially how much money they’re bringing in the household to the degree that they don’t qualify anymore, they’re not going to be able to refinance,” he said. “They’re going to continue to pay on that loan at 4%, instead of taking advantage of these record-low interest rates.”
Hall advises the best way to prepare for changes in one’s borrowing or financing picture is to talk to a mortgage lender early, long before making changes, to understand the full impact.
Hall Financial works with a network of real estate professionals, and they have seen in the past two years the biggest home appreciation numbers, percentagewise, in living memory. Hall said it’s generally recognized the 15%-20% growth in home values year over year will not be sustainable much longer, but it’s likely the market will continue along the lines of 3%-8% appreciation over the next year or two. He said he doesn’t believe the current inflationary trend represents a bubble that will burst.
“On the surface, just based on where housing values are, where the economy is now, where interest rates are, I’m not anticipating any type of a bubble,” Hall said.
“At the same time, we don’t know what’s coming down the pike next, so we’ve just got to continue to keep our eye on it.”