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Americans are quitting the workforce in record numbers for various reasons since the Covid-19 pandemic began, causing many people to rethink life choices, like returning to that low-paying service job.
The labor participation rate, which measures how many working-age people (15 to 64 years old) are in the labor force, is at the lowest level since the 1970s. In August, 4.3 million Americans left their jobs—the highest number in 21 years, when the U.S. Bureau of Labor Statistics began tracking this data in 2000.
But what happens if the people who’ve left their jobs want to buy a house in the next few months or years, particularly when housing market prices continue to climb? Albeit, the stories of people who have left jobs run a gamut of reasons, like they were tired of working at restaurants for minimum wage, decided to finally retire, found better paying careers or wanted to start a new business. However, not all resignations are equal in the eyes of mortgage lenders.
We’ll break down how mortgage lenders view applicants based on sudden employment changes.
People Are Walking Away From the Workforce—and the Reasons Are Many
To better understand how lenders view a mortgage applicant’s income, let’s talk about the so-called great resignation and a shift in why people are leaving their jobs influx.
The most common reason people left their jobs during the pandemic is age. Boomers retired at double the rate in 2020 than they did in 2019, which shrunk the labor pool by some 30 million people.
For people who are not at retirement age, there are various reasons for the recent wave of people leaving their jobs, including pandemic-induced wake-up calls.
Dr. Anthony Klotz, an associate professor of management at May Business School at Texas A&M University, who coined the phrase “the Great Resignation,” said in recent media interviews that Covid’s impact likely caused many to reflect on their own lives, careers and passions, resulting in some choosing not to return to the same job if they weren’t happy.
There are other potential causes: fear of contracting and spreading Covid, inadequate childcare, difficult school schedules and low pay. Others left their jobs to start their own business to fulfill a life dream.
In September, 309,000 women over age 20 exited the workforce, despite 194,000 new jobs becoming available, according to the Labor Department.
A recent Freddie Mac survey found that the vast majority of single female heads of households who dropped out of work during the pandemic (75%) have not returned. Among the reasons for not going back included not finding a job (22%) and Covid remaining a threat (14%).
Freddie Mac Survey of single women: When do you plan to return to the workforce?
| Responses | Percent of respondents | |
|---|---|---|
| Already have | 25% | |
| When I can find a job | 22% | |
| Not sure | 19% | |
| When Covid isn’t a threat | 14% | |
| Other | 10% | |
| Never | 9% | |
| When children go back to school/childcare | 1% | |
| Source: Freddie Mac | ||
Running parallel to a drop in workforce participation is a spike in buyer demand for single-family homes.
During the start of Covid, low-income workers were hit hardest as the hospitality and service industries were forced to shut down. Meanwhile, many middle- and upper-income workers were able to work from home, so their income was less affected by the pandemic.
No longer needing to work in a big-city office, some at-home workers moved out of major metro areas to find more space (and sometimes, for less cost) in suburban and rural areas. Others may have simply decided it was time to pursue their dream of owning a home when faced with a life-altering pandemic.
At the same time, construction is lagging as building supplies became more costly, there are less single-family homes available for sale (especially affordable ones), and competition is high for the homes that are available for sale. These factors, and more, have caused home prices to skyrocket, and supply to become more limited. Inventory of single-family housing was down 13% in September from the same time last year, according to the Association of Realtors (NAR).
So if you are considering leaving or changing your job, here’s how your career moves can impact your ability to buy a dream house down the road.
How Lenders View Gaps In Employment
Most lenders want to see at least two years of consistent work history; however, changing jobs is acceptable, as long as the break between the old job and the new isn’t too long.
But how long is too long? The short answer is 30 days between jobs is the maximum amount of time you can get away with before lenders begin raising an eyebrow. More than 30 days and lenders will probably want a good reason why before they approve you.
“Gaps can be addressed with a letter of explanation,” says Shant Banosian, a loan officer at Guaranteed Rate. “If there is an extended gap of employment (more than six months), we may require the borrower to be on the current job for a minimum of six months.”
Banosian says that requirements might differ depending on the loan product, as well.
Since lenders are trying to determine your ability to repay the mortgage, they’ll also look at your salary. If you leave a job for another one with a higher pay grade, that can earn you bonus points. However, a job change that results in a lower salary is not always good.
“A change in position that brings less income or makes your income less predictable could serve as a red flag for your loan officer,” says Shashank Shekhar, CEO at InstaMortgage.
A Change in Vocation Can Hurt Your Application
While it might seem logical that money is money, and how you earn your salary shouldn’t matter, it does for lenders.
Would-be buyers who are considering big career shifts—like going from chef to an accountant—might have to work in their new industry for a couple of years before they can get approved for a mortgage. Even if you earn the same amount of money in your new career as you did in your last, lenders might not view you as stable.
“Also important is the number of years of experience in the same field. Most loans require at least two years of experience in the same field,” Shekhar says. “So, constantly changing the industry you work in or the kind of job you do will have a negative impact on your loan qualification.”
Working for Yourself
During the pandemic, there was a surge in new business creation. According to the U.S. Census Bureau, almost 4.4 million new businesses were created in 2020.
While owning your own business can be self-empowering, it can also make it tricky to get a mortgage. Typically, self-employed borrowers have to show two consecutive years of tax returns, and profit-and-loss statements.
Borrowers who have been self-employed for less than two years will typically have to provide a minimum of one year of federal tax returns, a current profit-and-loss statement as well as two previous years of work history, preferably in the same field.
“Additionally, for self- employed borrowers, there will be other factors that become very important, such as a review of recent business bank statements and a year-to-date balance sheet,” Banosian says.
There are some lenders that will accept bank statements in lieu of tax returns, says Brandon Snow, executive director at Ally Bank. These loans are called “bank statement loans” or no-income verification loans, also known as no-doc mortgages.
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If You Want to Buy A Home, Do So Before You Quit Your Job
For people who plan on buying a home in the next few months or even a few years, it’s important to consider your employment status now. You might have to weigh what’s more important in the near-term: career goals or homeownership goals, especially if you’re planning to switch careers or start a business.
“Find a lender you trust, who you can be transparent with,” Snow says. “Before you make any big moves, talk to a lender about how that might affect your chances of getting a loan.”
If your next job comes with a bigger paycheck but is in a different field, your lender can advise you on how that can help or hurt your chances of getting a mortgage.
