FHA Guidelines on Income and Employment Gaps
This blog will discuss and cover FHA guidelines on income and employment gaps. We will detail the FHA guidelines on income and employment gaps for homebuyers. Homebuyers do not need to be employed in the same job for the past two years to qualify for FHA loans. FHA guidelines on income and employment gaps for home buyers were released in January 2023 under HUD’s FHA 4000.1 Handbook.
FHA loans is the most popular mortgage loan program for first-time homebuyers, borrowers with bad credit, borrowers with low credit scores, homebuyers with outstanding collections and charge-off accounts, and borrowers with high debt-to-income ratio.
On traditional mortgage loans such as FHA, VA, USDA, and conventional loans, the borrower’s employment history and qualified income is one of the most important factors for a mortgage underwriter to issue a mortgage loan approval. In the following paragraphs, we will be covering FHA guidelines on income and employment gaps.
The Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders. To ensure borrowers can settle their loans, the FHA has specific guidelines for income and employment. These guidelines help determine a borrower’s ability to make consistent mortgage payments, thus reducing the risk of default.
General Requirements for Income Verification
To qualify, borrowers must provide comprehensive income documentation. This documentation confirms that the income is consistent, dependable, and adequate to meet the mortgage payments and additional related expenses. Key requirements for income verification include:
- W-2 Forms: Borrowers must provide W-2 forms for the past two years to verify their income from employment.
- Pay Stubs: Recent pay stubs, covering at least 30 days, are required to confirm current income levels.
- Tax Returns: Federal tax returns for the past two years are necessary for self-employed individuals or those with additional income sources.
- Proof of Other Income Sources: If the borrower receives alimony, child support, Social Security benefits, or other forms of income, they must provide official documentation to verify these amounts.
Employment History Requirements
The FHA requires borrowers to have a stable employment history to ensure they have the financial capacity to meet their mortgage obligations. The key employment history requirements include the following:
- Two-Year Employment History: Borrowers must typically have been employed for at least two years in the same job or field. This history demonstrates job stability and a steady income stream.
- Employment Gaps: While employment gaps are permitted, they must be adequately explained and documented. For six months or less gaps, borrowers must be back at work for at least six months before applying for a loan. For gaps longer than six months, borrowers must provide a two-year work history before the gap and have been back at work for at least six months.
- Job Changes: Frequent job changes are acceptable if the borrower demonstrates consistent income and employment stability. However, the nature of the job changes (e.g., moving within the same industry or field) may be scrutinized more closely.
Importance of Stable and Reliable Income
Stable and reliable income is critical for FHA loan approval because it assures lenders that the borrower can consistently meet mortgage payments. The FHA considers several factors to determine income stability:
- Consistency: Borrowers must show a consistent income stream over time, minimizing the risk of future income disruptions.
- Verifiability: All income sources must be verifiable through official documentation, such as W-2 forms, tax returns, and pay stubs.
- Sufficiency: The income must be sufficient to cover the mortgage payments, including principal, interest, taxes, and insurance (PITI), as well as other debts and living expenses.
- Future Stability: Lenders assess whether the income is likely to continue. For example, seasonal or part-time employment income must have a history of consistency and be expected to continue.
By adhering to these guidelines, the FHA aims to ensure that borrowers have the financial means to maintain their mortgage payments, thereby reducing the likelihood of default and promoting sustainable homeownership.
How Much Work History Do You Need For an FHA Loan?
HUD requires two years of employment history and two years of residential history. HUD’s two-year employment history requirement does not mean that a borrower needs to be employed with the same employer for two straight years.
Gaps in employment have been permitted in the past two years. Unfortunately, most mortgage lenders have mortgage lender overlays. Overlays are lending requirements above and behind those of minimum HUD Guidelines imposed by individual lenders.
Gustan Cho Associates is a national mortgage company licensed in multiple states with no lender overlays on government and conventional loans.
Can You Qualify For a Mortgage With Employment Gaps in the Past 2 Years?
They require two years of employment history with the same employer and no employment gaps in the past two years as part of their lender overlays. Borrowers who are told they do not qualify for an FHA Loan due to employment gaps, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.
Gustan Cho Associates no FHA lender overlays on FHA loans. Gustan Cho Associates has no overlays on government and conventional loans. Borrowers with multiple gaps in employment can qualify for FHA home loans.
In the following paragraphs, we will go over the qualification requirements to qualify for a mortgage with gaps in employment in the past two years.
How Many Job Changes In The Past Two Years Does FHA Allow?
FHA Guidelines on Income And Employment Gaps state if unemployed for six or more months and get a new full-time job, borrowers need to stay on a new full-time job for at least six months to qualify. Mortgage applicants do need two years of employment history. But the two years of employment history does not need to be continuous.
Lenders like to see mortgage loan borrowers in the same job for the past two years, but that is not an FHA guideline. If they have changed jobs, they would like for them to be in the same field for the past two years. However, being in the same field with changing jobs is not an FHA Guideline. That call is up to the mortgage underwriter’s discretion.
If the mortgage loan borrower has had a change in employment within the past six months and got a new full-time job before the six months gap in employment requirement, there is no seasoning requirement for a new full-time job. Can qualify for an FHA loan with a job offer employment letter. But cannot close on their FHA loan until they can provide 30 days of paycheck stubs.
FHA Job Gap Requirements
HUD guidelines on income and employment gaps with multiple jobs in the past two years will require a letter of explanation as to why the borrower had multiple jobs in the past two years. If it is the case of one better job offer after another due to the worker’s talent and higher income opportunities, it is perfectly acceptable. However, mortgage loan underwriters will question why a borrower would have multiple jobs in the past two years.
How Many Jobs Can You Have In The Past Two Years For an FHA Loan?
HUD has no rule that a borrower with multiple jobs in the past two years cannot qualify.
Mortgage underwriters can use the underwriter’s discretion in denying a loan applicant with multiple jobs in the past two years. This is especially if the borrower has jobs that have declining incomes and fewer hours of employment.
Underwriters need to feel comfortable that the new full-time job and income will likely continue for the next three years. Again, this is a case-by-case matter and ultimately will rely on the mortgage underwriter’s discretion.
Frequently Asked Questions (FAQs)
1. What are FHA guidelines regarding employment gaps?
FHA guidelines generally require a borrower to have a stable employment history or be employed continuously for at least two years. However, gaps in employment are allowed under certain conditions:
– If the gap in employment is six months or less, the borrower must have been back at work for at least six months at the time of the loan application.
– If the gap is over six months, the borrower must have been back at work for at least six months and provide a two-year work history before the employment gap.
2. Can I qualify for an FHA loan if I have an employment gap of more than six months?
Yes, you can qualify if you have been employed for at least six months after the gap and can provide a two-year work history before the gap. To ensure stability, lenders must verify the reason for the gap and your previous work history.
3. What types of income are considered stable and reliable by FHA guidelines?
The FHA considers various types of income as stable and reliable, including:
*Salaries and wages
*Overtime pay
*Bonuses
*Commissions
*Part-time employment
*Seasonal employment
*Self-employment income
*Alimony and child support
*Investment and rental income
*Social Security, retirement, and disability benefits
All income types must be verified and documented for at least two years.
4. How does the FHA view self-employment income?
The FHA accepts Self-employment income, provided the borrower has been self-employed for at least two years. Lenders will typically require:
*Two years of federal tax returns
*A year-to-date profit and loss statement
*A balance sheet Self-employment income should be stable or increase over the next two years.
5. Can seasonal and part-time employment be used to qualify for an FHA loan?
Yes, seasonal and part-time employment can be used, provided there is a two-year history of receiving this income, and it is expected to continue. Lenders may require evidence of consistent work patterns during the seasonal periods.
6. What documentation is required for income verification for FHA loans?
Required documentation includes:
*W-2 forms for the past two years
*Pay stubs covering the most recent 30 days
*Federal tax returns for the past two years (if self-employed or have other income sources)
*Proof of other income sources, such as alimony or Social Security benefits
7. How does the FHA handle gaps in self-employment income?
If a borrower has a gap in self-employment income, they must demonstrate that they have been back to self-employment for at least six months and provide documentation of their self-employment activities and income before the gap.
8. Can I still qualify for an FHA loan if I have multiple jobs or frequently change jobs?
Yes, you can still qualify if you have multiple jobs or frequently change jobs, as long as there is no significant gap in employment. The FHA looks for consistency in income and a stable employment history over the past two years.
9. How are gaps in employment due to COVID-19 treated by the FHA?
The FHA has provided temporary guidance for employment gaps due to COVID-19. Borrowers must demonstrate that they have been re-employed for at least six months and that the re-employment income is stable and likely to continue. Additional documentation may be required to verify the reason for the gap.
10. Can any compensating factors help if I have an employment gap?
Yes, compensating factors such as a strong credit history, significant cash reserves, or a high income relative to debts can offset the risk of an employment gap. Lenders may consider these factors when assessing the overall risk of the loan.
Can I Get an FHA Loan If I Just Started New Job?
Per FHA guidelines on income and employment gaps, borrowers can have gaps in employment in the past two years and qualify for FHA loans. Homebuyers and Homeowners who need a national mortgage broker with no overlays on government and conventional loans, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays.
I have had multiple job changes in the past few years and am worried it will affect my ability to qualify for an FHA loan. Will my employment history be a major factor in the approval process?”,
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No. You should be fine.