A friend at work has been engineering his exit from the corporate world for many years. He was planning never to be chained to a desk anymore and was looking forward to being an entrepreneur. His biggest expense is his mortgage. His mortgage rate was influenced by his secure employment of 12 years and he enjoyed a very low interest rate. After he left his secure full time job, he had asked the bank torefinance his mortgage. He was surprised when the first document the bank asked for was his proof of employment and a recent pay stub. This is the criteria the bank uses to determine stability and risk. This got me thinking! If you are planning to exit a secure and stable employment (by choice or voluntarily) in order to pursue your dreams of entrepreneurship, you should first plan for the following:
You need a T4 or NOA: No underwriter is going to approve your mortgage if they don’t have evidence of a steady paycheck. The longer you have had your steady paycheck, the more comfortable they will feel. If you have a goose egg for all, then you are likely going to be denied. The exception to the rule is if you have significant amount of other assets as collateral and you have a large enough recurring stream of income that has been established for many years prior.
A new job carries less weight. Even if you do become a successful entrepreneur, the bank generally wants to see a year of steady income giving you a loan. A new banking relationship with the best rate will be gun shy with someone who has only been at their job for six months. Of course, if you are refinancing with an existing bank, you might have more leeway.
Banks are forced to be cautious. The hoops you have to jump through these days to refinance your mortgage are smaller and surrounded by fire. Government involvement in our banks has made banks less flexible and the 2008 financial crisis did not help. The government has added new checks to make sure the bank is not being reckless with their lending practices. This is a good thing and helps not to over extend the consumer by increasing their debt load.
Lower your own risk of default. You need to be able to weather the bad times so that you are never late on payment which will hurt your credit score. Ultimately you want to lower your risk of losing your home. The bank doesn’t want you to default since they are not in the business of selling real estate.
Refinance your mortgage before quitting, retiring, engineering, or simply taking an extended leave of absence. Once a bank sees your main source of income gone, they will unlikely let you refinance with them because you are perceived as higher risk. It doesn’t matter how high your credit score is, how loyal you have been to the bank, and the fact you have a baseball collection worth more than your mortgage itself. If you no longer have a job, it is almost impossible to get a mortgage or refinance a mortgage.