Fun when chosen, not so fun when mandatory – employment gaps can happen to anyone. Sometimes they are by choice … sometimes, not so much. Whether you’ve experienced one and got to spend that time sailing around the world, or you were too busy looking for your next gig, employment gaps can and do happen to many of us. So, let’s talk about them openly, especially for those of you who’ve had one and are now interested in applying for a mortgage.
The good news
The first thing to know is that a gap in employment doesn’t automatically disqualify you for a mortgage. YAY! The rule of thumb here is that a lender needs to see your two-year work history. So, if you happened to have a gap prior to that two-year period, you most likely don’t even need to talk about it with your lender.
When does an employment gap become an obstacle?
But what if you did have a gap, or gaps, in those last two years? Let’s be real, the height of the pandemic was rough for everyone, and maybe that tough time included employment gaps for you. If you have two or three months between jobs, it’s usually not considered an employment gap but rather a job searching period (cue sigh of relief). Lenders will generally only look at, and be concerned by, unemployment stints that last longer than six months.
To put it simply, if you have a gap of less than six months, this may be perfectly okay and not have any impact on your loan application; one year, though, for example, would delay your new mortgage approval if it occurred in the previous two years. This timeframe is defined by the Federal Housing administration (FHA), and it has set the standard that other lenders follow. It’s also driven by Fannie Mae and Freddie Mac guidelines to qualify for a conventional loan.
Employment gap lender rule of thumb:
<Six months is okay
>Six months is an employment gap
Let’s look at some loan-specific examples.
FHA-specifics
Do you want a FHA loan and have been currently employed at the same job for over six months, but still have a six-month gap of employment in the past 2 years? If you can show proof that you have now been employed for at least a six-month period before requesting a FHA loan, AND that before any employment gap you worked for two-years straight or longer, you have the potential to get approved. Remember, the FHA provides government-backed loans that will let you get approved for a mortgage with looser financial requirements (although some other requirements, like the appraisal, may be more restrictive, so it’s a give-and-take).
Conventional, VA, and USDA loans
These loan types offer more leniency, but that leniency depends on the circumstances surrounding the employment gap. Your underwriter will take into considerations many factors, like your cash reserves, your down payment, and your credit score to determine whether the gap factors into your qualification or not.
Wait, I just entered the job market and don’t have two-years of history
Now, what about situations like those ambitious young people who haven’t even had a chance to work full-time for two years, but they’re ready to apply for a mortgage?
Even if you are just starting your career, you have the potential to be approved for a mortgage. There are situations where a lender will approve you based on a job offer alone, especially if it’s a high-earning one. You will need to provide documentation to support your future employment claim (and congrats on the new job!).
For those homebuyers who are recent college graduates, you can sometimes use your university transcripts to stand in as your two-year employment history.
I’m not a recent student, and I don’t have a two-year work history. Am I out of the running?
You’re still in the game, but it’s going to take more effort to find a lender who will accommodate you. When you apply for a mortgage, adding explanations and showing as much documented proof of your financial situation as possible will only help.
Consider these questions:
- Can you provide proof that you’ll have a 15% down payment via bank statements?
- Is your credit score better than 500?
- Is there an acceptable reason why you have the employment gap?
- Was the six or more months due to a job loss and the time it took you to find new employment?
- Can you now show proof of 30-days of employment?
- Were you taking care of an ill family member, which didn’t allow time for work?
- Do you have a newborn child, or take extended maternity leave?
- Did you go back to school?
- Did you pay your rent consistently during your gap?
Keep in mind that lenders want to see stability in your work and income earnings history, and that’s totally understandable; they want to know that when they loan you money, you’ll be able to pay it back. Can you be counted on? If your answer is yes, prove this through documentation that shows several years’ worth of employment and financial history to give a more complete picture.
The bottom line
Buying a home is likely to be the largest financial transaction that you’ll make in your lifetime. Lenders want to reduce any risk that you’ll default on that loan, and a big piece of that is guaranteeing your employment history.
That’s why they want to see a stable two-year history of employment. If you have an employment gap, providing relevant documentation can get your application approved. Also keep in mind that lender guidelines are not stagnate; they change to accommodate more and more homebuyers all the time, so don’t rule yourself out.
Each mortgage application is reviewed on an individual basis, and lenders can be understanding of common and logical employment gaps. We don’t live in a cookie cutter world, and some situations are unique or even tough, and we want to help. Contact Homespire to see how we can get you into a home to call your own.
This is not an offer for a loan or any type of extension. Eligibility for a loan or extension of credit from Homespire Mortgage Corporation is subject to completion of a loan application, credit, income, and employment qualification, and meeting established underwriting criteria. Rates are subject to change without notice based on market conditions. See Loan Consultant for information on program income limits, buyer contribution, area median income, debt requirements, and other application details.