Loan requirements vary from one credit product to another. Employment history has a strong bearing when assessing credit legibility of some loans and not others, for instance, when applying for a mortgage, you are required to have a strong employment history. Otherwise, the employment factor would be enough to disqualify your loan prospects and hence your dreams for a home. Equally, when applying for a personal loan, or asset finance, employment history has a little to do with the loan application and qualification. This article is going to discuss how employment history is essential in financing and other factors that make the list of eligibility variables for lenders.
Initially, lending rules and regulations were not as tight as they are. During the housing boom, lenders would waive documentation and security scrutiny, including employment requirements. However, after the turn of the last decade, every lender has enacted stricter rules governing the lending industry in an attempt to reduce default cases and transparency. Since then, documentation is not an option, as well as employment history and security scrutiny.
- Employment history for a mortgage application
This standard norm applies to both those who are conventionally employed and those who are self-employed, for example, those in business. If you need this impediment moved past, you need to source a lender who understands your situation to create a scenario where you are not limited to one factor in the many that are equal requirements.
- How employment history is verified for a mortgage
There are varied ways with which lenders would verify your employment history for a loan. Usually, they only need verbal verification from the employer that is by contacting the employer directly to inquire of your employment status with supporting evidence. Furthermore, some lenders require a signed document from the employer to verify that you are under the employer’s payroll. Some would go for official faxes and emails.
Also, employment status can be obtained from the taxman. Tax statements are a sure way to derive one’s employment history since the statement gives a detailed tax remittance scheme, which shows both the job group and the income estimate of the borrower. This is mostly used to gauge the job history of those who are self-employed since there is no official documentation to verify this. The transcript of tax returns shows sufficient information to know the history of the borrowers’ works.
Also, the lender may want to review the borrower’s bank statements and payslips to trace the flow of income. This may not be a standard measure, especially for those who are self-employed, but it would prove useful for those who have a stable service job. Also, other than enquiring about the last two years, the lender would want to be assured that the employment would be in continuation. Therefore, they would enquire about the possibility of employment to continue.
However, this may apply to those who have not been in their current company of employment for more than two years.
Loan application principles
Other than employment history, there are some fundamental principles that lenders often consider before lending out cash to prospective borrowers. They include;
- Credit history
Your lender would like a guarantee that you are a low-risk borrower by reviewing your credit scores. This is done in two ways; there is a soft and hard credit pull on both the personal level and business level. If your business is a startup, and then your report would be required in place for the business. It is possible that you would have a history that may be marred with debts both on consumer and commercial levels. Hence it is advisable to seek clearance of your credit records before applying for a loan.
- Collateral
This is usually the credit security you offer the lender in exchange for the financing such that in case of defaulting on repayment, the lender may seize the asset in settlement of the debt. However, you should note that this works mostly on those loan products which are secured. Unsecured loans do not require any form of an appraisal. Usually, the value of your loan is determined from a combination of variables such as income, credit history, security, etc. although in most cases, the value of your collateral plays a significant role in determining the loan amount you qualify for.
- Proof of income
This seeks to ascertain that apart from being able to afford the down payment, the borrower is also able to repay the debt without struggle as agreed upon in terms of the loan. Among other things, the lender would like to know that the finance they give will be back. Therefore, your lender would need your bank statements, tax statements, and most recent pay slips to ensure that indeed you are earning revenue, which is enough to shoulder your debt repayment installments and the down payment requirements.
The Bottom Line
As discussed above, it is clear that not all loan products insist on an employment history to be eligible for a loan. However, most of the financing requires that you have a good income back up to be able to repay the debt. Good credit history and a hefty deposit towards the loan application can qualify you for a higher loan limit. Still, it would be best if you convinced the lender that you have another income source that is stable enough to help you in loan repayment. The loan industry is flexible so that the rules keep changing over time. For the case of mortgages, it is a standard rule that you need at least a two year supported employment history to be eligible for a loan. However, this would likely change as time goes by. Equally, it is worth noting that most lenders are flexible with the borrower’s situations.