Buying a home should be an exciting prospect but if you’re between jobs or about to start a new position, it can be more difficult to get lender approval for a mortgage.
Or, rather, it was — but that’s no longer the case, thanks to offer letter loans. Offer letter loans have become popular over the past few years because they enable borrowers who have a job contract but haven’t started working yet to receive a mortgage without the wait.
To learn more about offer letter loans — what they are, their requirements and what kind of loans you can apply for with an offer letter — take a look at the questions below.
What is an offer letter loan?
An offer letter loan is any type of mortgage that receives lender approval based on a job offer letter. The lender uses your future income — your estimated earnings in your new position — to calculate your ability to repay and determine the amount you can borrow.
Offer letter loans are based on either a fixed-rate or an adjustable rate mortgage. The only difference between an offer letter loan and a standard loan is the method by which the lender verifies your income; it is the same in all other respects.
Who is eligible for an offer letter loan?
The offer letter loan program was designed to give those who are in between jobs or about to start a new job an easier path to homeownership. The most common applicants for offer letter loans include:
- Recent college, law school, business school and medical school graduates who are about to start a new job
- People who are in between jobs and need to move
- Employees relocating for a new job
- Employees transitioning from one position within their community to another
- Employees receiving an increase in salary
What are the requirements for applying for an offer letter loan?
There are five basic criteria you must meet to be eligible for an offer letter loan:
- The offer letter must be non-contingent. In other words, the letter must have no conditions of employment, such as “dependent on clear drug test” or “dependent on clear background check.” The letter must clearly state your salary and starting date and must be signed by both you and your new employer.
- The starting date listed in the offer letter must fall within 90 days of the mortgage closing date to be valid.
- You must provide evidence that the home you are purchasing will be your primary residence.
- You must provide evidence that the home you are purchasing is either a detached single-family residence, townhome, condominium or Planned Unit Development.
- You must demonstrate that you have sufficient reserves to pay mortgage rates, real estate taxes and homeowner’s insurance during the time between closing and your start date (as much as three months’ worth), as well as an additional three months’ worth of reserves.
What types of loans can I apply for with an offer letter?
You can use an offer letter for any type of loan, however, the requirements for an offer letter loan vary from mortgage to mortgage.
FHA: To receive approval for an FHA loan with an offer letter, you must submit a copy of your offer letter and prove that you have sufficient reserves to cover cost obligations, as well as other liabilities, until you begin the job.
USDA: The USDA follows the same guidelines for offer letter loans as the FHA.
VA: The VA will only approve an offer letter loan if you have worked in the same line of business or field for a minimum of 1 year.
Fannie Mae (FNMA): To receive approval for an FNMA loan with an offer letter prior to starting a new job, you must provide a copy of the letter, your start date must be within 90 days of closing and you must have six months’ worth of reserves on hand. If, however, your start date is within 60 days of closing, you only need three months’ worth of reserves.
To receive approval for an FNMA loan with an offer letter after you’re started your new job, you must provide a copy of the letter and one paystub consistent with the salary outlined in the letter.
Freddie Mac (FHLMC): FHLMC currently offers two offer letter loan options.
The first option is available for single-family primary residences and no cash-out refinance only. To receive approval, you must provide a copy of your offer letter, 10-day pre-close verification of employment and documentation of reserve funds. Your start date must be within 90 days of closing and you must have six months’ worth of reserves on hand. If, however, your start date is within 60 days of closing, you only need three months’ worth of reserves.
FHLMC will reduce the amount of required reserves based on the income you earn prior to your start date. For example, if you remain in your current position for a month prior to beginning your new position, FHLMC will reduce your required reserves by the amount you earned during that month.
The second option is available for 1-4 unit primary and secondary residences, 1-4 unit investment properties, no cash-out refinances and cash-out refinances. To receive approval, you must provide a copy of your offer letter and documentation of reserve funds. Your start date must begin prior to your loan delivery date and you must have sufficient reserves to cover cost obligations, as well as other liabilities, until you begin the job.
Again, FHLMC will reduce your required reserves by the amount you earned during that month.