The Steps to Purchasing a Home With Seasonal Income in Florida
Working in a seasonal profession allows you to pursue other interests during your off months. However, it can also make it quite challenging to qualify for a mortgage loan. This is because most lenders view seasonal income as sporadic, even if you usually work part-time or as a self-employed business owner. While you might have difficulty finding the best financing option for your needs, it's not impossible!
Here's everything you need to know about purchasing a home with seasonal income.
Are You Ready to Invest in a New House?
Before you leap into buying a house, you have to ask yourself the big question - I'm ready for this? It's crucial to be forthright about whether you're prepared to embark on this expensive emotional journey.
A safe homebuying timeline should start about 5 years to give you enough time to save for your down payment and build your credit score. But whatever the timeframe, make sure you start by answering this fundamental question.
There are various factors to consider when buying a house, and one of the most important things you can do, especially if you've never purchased a home before, is to start early preparations.
Get Your Finances in Order
First, you want to make sure that your finances are in order. The earlier you wrap your head around your financial status, the better.
Your credit score (also known as the FICO score or credit rating) will be the decisive factor that determines the amount of interest rate your bank offers you on your mortgage loan. Simply put, a lower credit score equals a higher interest rate.
Credit ratings range from 350 to 850, with approximately 715 being the median FICO score in the United States. The minimum rating that many lenders will consider for a mortgage loan is about 630.
You may be unsure of the money you need in your bank to buy a house. Most homebuyers believe they'll only have to pay the down payment upfront, but that's not true.
It would help if you prepared for several other upfront costs for starters, such as your earnest money deposit. Also known as the good faith deposit, this is the amount of money you put down to show your seriousness about buying a house.
It's usually a small percentage of the down payment given to an impartial third party. Other costs include:
- Home inspection
- Down payment (some loans, such as VA loans, require no down payment)
- Closing costs
Some lenders may factor insurance costs and real-estate taxes, or you may be mandated to make these payments separately each month.
Debt-to-income Ratio (DTI)
Calculating your DTI will help you know how much you can use on your monthly mortgage loan by comparing your total monthly debt payments against your monthly gross income. Remember to include the estimated cost of your future mortgage and other debts like credit card bills, car payments, student loans, and any other monthly due.
If your ratio is high, you may have to increase your income or pay off existing debts before buying a house. Even if all your finances check out, ensure you do a gut check to ensure that this is the perfect time to invest in a new home.
Start by looking at your current employment situation. Consider present lifestyle factors, such as when your current lease expires and whether you could see yourself committing to one neighborhood for the next few years.
Get the Ball Rolling for a Loan
Before buying a house, you need to know what mortgage options can help you visualize your dream. One of the best ways of doing that is to present your financial information to mortgage lenders.
A very early and essential step in this process is getting pre-qualified. Lenders usually provide a pre-qualification in writing to confirm the loan type and amount they're willing to offer. While this commitment can help you understand your options, it's not an official guarantee to receive the mortgage.
You can also get a pre-approval loan, which offers a written commitment for a specific mortgage from a lender. Once you complete your application, the lenders will verify your credit history and income before sending a pre-approval letter with your qualification details. Generally, pre-approval letters last for about 30 to 60 days. So, make sure you're serious about buying a home before proceeding with a pre-approval.
Pre-approval and pre-qualification help you understand your mortgage loan options and show home sellers that you mean business. If there are multiple offers, a seller will most likely not accept it unless a pre-approval or a pre-qualification letter is attached.
The lender will take you through the different loan types available in this process. Here are some common examples that you'll see:
A fixed-rate mortgage is a loan where its rate remains the same throughout the mortgage term.
An adjustable-rate mortgage starts with a fixed rate but eventually goes to a variable rate that usually changes every year.
A conventional loan is a mortgage that any government agency does not back. Instead, they follow Freddie Mac's (FHLMC or Federal Loan Mortgage Corporation) and Fannie Mae's (FNMA or Federal National Mortgage Association) regulations. While they don't offer some VA, USDA, and FHA benefits, they remain the most common type of loan.
- Government-insured loans are backed by the government, offering perks such as low down payments through VA loans for veterans, FHA loans, and USDA for rural buyers through the Department of Agriculture's mortgage loan program.
Your lender will help you determine which loan is best for your needs based on your financial status and goals. But keep in mind that you don't have to work with the lender that pre-approves or pre-qualifies you. Shop around to ensure you can leverage the best rates and terms possible.
Challenges a Seasonal Employee May Face When Applying for a Mortgage
To qualify to buy a home, you need to prove to your lender that your income is reliable and you're a creditworthy borrower. You have to provide documentation, such as W-2s and tax returns, to prove to the underwriter that you've worked for the same company or been in the same line of work for the past 2 years.
The lender will also need documentation from your employer that shows they'll hire you again during the following season. Even if you've worked for your employer for 2 years now, you might not get the loan if they can't guarantee that you'll work for them the following season.
Importance of a 2-year Work History
Your financial institution wants to ensure that you've got the means to pay the loan. The 2-year work history rule was established to protect lenders and homebuyers alike. And if you can prove with documentation like paystubs, W-2s, or 1099 forms that your income is reliable, your institution will be able to approve your loan application quickly.
On the other hand, if you don't have a 2-years work history, you'll be ineligible for a mortgage. However, you can choose to wait and reapply once that information becomes available.
Another alternative, especially if you need a mortgage now, is to secure it using one of the following recommendations:
Apply with another person - Adding another person to your loan application may significantly increase your chances of qualifying as your lender will count both parties' incomes and credit scores consideration. Putting a co-signer or co-borrower on the application will help ensure that you'll have enough money to cover the monthly mortgage payments, should something affect your flow of income. This also gives you extra help through the homebuying process.
Verify that you've provided all streams of income - Any money you receive from passive investments, unemployment benefits, Social Security, interests, or dividends can help you get a loan. Just ensure you have the proper documentation of earnings for these different streams of income to present to your lender as proof.
Refer to your MOS (Military Occupational Specialities) - If you've been recently discharged from your military duties, you can ask your current boss to write a letter clarifying how your MOS helped you land a new job. This can enable your lender to use the letter as proof for continued employment, and they might even lessen or waive their employment history criteria.
Include your education - Depending on your financial institution, you may be allowed to use the time you spent pursuing your studies or getting certifications towards the 2-year work history eligibility requirement if there's a direct link between your education and your current position. You may also be asked to include a freelance job or a paid internship in your work history.
- Use a larger down payment - The less money you apply for, the more likely the lender will ignore your short employment history. At times, a lender that turns you down may approve your mortgage application later if you offer a larger down payment (as long as your credit score is high enough).
Types of Mortgage a Seasonal Employee Can Apply for
Suppose you're applying for a loan based on seasonal income. In that case, you'll still have to follow a similar procedure for determining mortgage eligibility as any homebuyer with a year-round income stream. When evaluating your application, your preferred financial institution will check your debts, credit history, monthly income, and bank statements. However, seasonal employment as the only source of cash flow also comes with its quirks.
Here are the different mortgage loan programs available to you.
Unlike government-backed loans, conventional loans are originated, serviced, and backed by private mortgage lenders like credit unions, banks, and other financial institutions. They're broken down into nonconforming and conforming loans based on whether or not they follow the regulations set by Fannie Mae (Federal National Mortgage Association and Freddie Mac (Federal Home Loan Mortgage Corporation.
This type of mortgage can be a viable option if you're looking at financing because you can afford a down payment on a home for as low as 3% at competitive interest rates. If your down payment is less than 20%, you'll need to pay for PMI (private mortgage insurance). Besides the common income considerations, you need a median credit score of 620 or better.
Advantages of conventional loans include:
- Low costs
- Higher loan limits
- Flexibility for some
Another advantage of these loans is that they're the only alternative from significant investors that will allow you to buy a second investment property or home.
The FHA (Federal Housing Administration) insured this type of government-backed home loan. It comes with less restrictive qualifications, making it a perfect option if you have a lower credit score or are stressed about coming up with the down payment. However, you'll also need to pay mortgage insurance.
The option of more lenient credit requirements and a low down payment can make FHA loans ideal for novice homebuyers. But you don't necessarily have to be a first-time buyer to qualify.
Some benefits of FHA loans include:
- Your lender can accept lower down payments
- Lower credit score requirements
- Closing costs can be rolled into your loan
- You can still qualify for an FHA loan even if you have financial issues in your history
The downside to these loans is the lifetime mortgage insurance requirement when your down payment is below 10%. And if you make a higher down payment, you'll still have to pay the MIP (mortgage insurance premiums) for 11 years.
Also referred to as a Department of Veterans Affairs loan, a VA home loan is one of the essential military benefits. It's available to qualified members of the National Guard, veterans, eligible active-duty service members, and surviving spouses.
If you qualify for a VA loan, you can refinance an existing home mortgage or buy a home with as little as a $0 down payment. Plus, their rates are often lower than you can get on other mortgage loans. Another benefit over traditional mortgage loans is that there's no Private Mortgage Insurance (PMI), the monthly insurance fee that acts as a cushion to protect your lender until you reach 20% equity.
The only disadvantage of taking a VA loan is the funding charges, which can be built into the loan or paid at closing. This fee lies in the range of 0.5 - 3.6%, depending on the amount of down payment made, the existing equity, the circumstance of your VA transaction, and whether it's a subsequent or first use.
Individuals exempted from the VA funding fee include:
- Surviving spouses receiving DIC (Dependency Indemnity Compensation)
- Those receiving VA disability
- Purple Heart recipients who've returned to active duty
Difference Between Part-time and Seasonal Income
The proper work schedule is crucial to your job satisfaction, workplace productivity, work-life balance, and mortgage loan application. Seasonal and part-time employment are just two of the many options you can consider. While they might sound like the same thing, they're different job professions.
A part-time job is a work you do for your employer throughout the year that's less than the average time (40 hours per week) done by full-time workers. Most companies often hire part-time employees to help with seasonal industry fluctuations or increased work demands. You can easily qualify for a loan with a part-time job because the likelihood of getting continuous income is high.
On the other hand, seasonal workers do tasks that are only needed at specific times of the year. For instance, large retailers, such as Best Buy and Walmart hire thousands of seasonal workers each year due to the increased shopping demands.
Choose Your Real Estate Agent
Once you've settled on the perfect mortgage for your home, it's time to find a real estate agent. A professional agent will take you through the ins and outs of the homebuying process.
As you look for a new realtor, make sure you settle for someone you trust and feel comfortable with. Interview a few potential agents before making a decision.
Ask each realtor about their client load, schedule, and experience. You'll want to find an expert who'll strive to make the entire home buying process seamless and will keep you posted every step of the way.
Buying a home with seasonal income can be a lengthy and complicated process, but putting in the time, care, and research to make your purchase go smoothly is worth it. If you're a seasonal worker, having proper documentation can mean all the difference between qualifying for a loan or not.
Before you start your mortgage application, make sure you have tax returns, bank statements, pay stubs, the last 2 years' W-2 forms, and any other documentation you can use to show proof of compensation.