May
15
,
2023
Are you worried about being denied an FHA loan because of a gap in employment? While it is important to remember that FHA loan standards for employment in HUD 4000.1 are not the only standards that are recognized, it is good to know what FHA loan rules instruct the lender to do as a minimum.
Additional lender standards may apply, but in general FHA loan rules, state law, lender standards, and even things that are considered “customary” in the local housing market all play a part in FHA loan approval and processing. What does HUD 4000.1 says about gaps in employment and frequent changes of employment? For starters:
“If the Borrower has changed jobs more than three times in the previous 12-month period, or has changed lines of work, the Mortgagee must take additional steps to verify and document the stability of the Borrower’s Employment Income. The Mortgagee must obtain:
- transcripts of training and education demonstrating qualification for a new position; or
- employment documentation evidencing continual increases in income and/or benefits.”
When there is a history of frequent changes of employment, the lender needs some added verification that the borrower is a good credit risk. What about gaps in employment? HUD 4000.1 states:
“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower’s current income as Effective Income if it can verify and document that…the Borrower has been employed in the current job for at least six months at the time of case number assignment; and…a two year work history prior to the absence from employment using standard or alternative employment verification.”
A brief gap would technically be acceptable under the FHA loan standard (not longer than six months). Could lender standards require such a work history even for shorter gaps in employment? That is possible, and permitted under the rules of the FHA single family mortgage loan program. Lenders can require stricter standards as long as those standards are applied according to the law.
Lender standards are often higher than FHA minimums. Additionally, state law, local practices considered reasonable and customary, and other factors could also factor into the loan approval process depending on circ*mstances. This applies to FICO score requirements, appraisal rules, issues where family members may be selling to one another, etc.
When in doubt, it never hurts to speak to a loan officer to ask what specific standards may apply at a particular financial institution or in a given housing market.
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FAQs
The employment requirements for FHA loans include having a steady income from a reliable source, typically demonstrated through at least two years of steady employment. Borrowers may be required to provide documentation such as pay stubs, W-2s or tax returns to verify their employment history.
What is the FHA 6 month employment rule? ›
“For Borrowers with gaps in employment of six months or more (an extended absence), the Mortgagee may consider the Borrower's current income as Effective Income if it can verify and document that…the Borrower has been employed in the current job for at least six months at the time of case number assignment; and…a two ...
What is the minimum employment history for a FHA loan? ›
FHA loan employment rules
FHA loan guidelines state that previous history in the current position is not required. However, the lender must document two years of previous employment, schooling, or military service, and explain any gaps.
What will disqualify you from an FHA loan? ›
The three primary factors that can disqualify you from getting an FHA loan are a high debt-to-income ratio, poor credit, or lack of funds to cover the required down payment, monthly mortgage payments or closing costs.
What happens if lender Cannot verify employment? ›
Employment Documentation Provided by the Borrower's Employer
If a lender cannot sufficiently document a borrower's income, they will contact the borrower's employer directly using a Request for Verification of Employment (VOE) or a third-party service.
What is acceptable for employment verification? ›
Documents that Establish Employment Authorization
Social Security account number card that is unrestricted. A laminated card is acceptable. A card that includes any of the following restrictive wording is not an acceptable List C document: NOT VALID FOR EMPLOYMENT.
Can I get an FHA loan if I just started a new job? ›
For borrowers who will have income from a new job, the rules say, "If a borrower is about to start a new job and has a guaranteed, non-revocable contract for employment that will begin within 60 days of loan closing, the income is acceptable for qualifying purposes."
Does FHA allow for income from a second job? ›
Enter the Two-Year Rule
Generally speaking, borrowers who want to use income from a second job to qualify for a mortgage loan in California must have a two-year work history with both jobs. In other words, they must be able to demonstrate the ability to manage both jobs, simultaneously, for at least 24 months.
What are the proof of income requirements for FHA loan? ›
FHA Income Requirements
Your eligibility for an FHA loan doesn't hinge on a particular income amount, but you must prove you have a steady employment history. Your income must be verifiable by sharing pay stubs, W-2s, federal tax returns and bank statements with your lender.
Who gets denied an FHA loan? ›
While FHA loans are known for their lenient credit requirements, a history of late payments, bankruptcies, or high credit utilization can still lead to denial. Lenders use credit history as an indicator of a borrower's ability to manage debt responsibly.
FHA appraisal and inspection checklist
Must have an undamaged exterior, foundation and roof. Must have safe and reasonable property access. Must not contain loose wiring and exposed electrical systems. Must have all relevant utilities, including gas, electricity, water and sewage functioning properly.
Why would a house not pass FHA financing? ›
Homes that may not pass an FHA inspection
Health and safety concerns: Properties with potential health and safety hazards, such as lead-based paint, asbestos, or mold, may not qualify for an FHA loan.
How do home lenders verify employment? ›
Mortgage lenders verify employment by contacting employers directly and requesting income information and related documentation. Most lenders only require verbal confirmation, but some will seek email or fax verification. Lenders can verify self-employment income by obtaining tax return transcripts from the IRS.
Do underwriters always verify employment? ›
Lenders typically verify your employment twice: when you apply for a home loan and several days before closing. They don't usually check your employment after closing, but they may in some cases. Loan companies verify employment multiple times because they need confidence you have a stable enough income to buy a home.
How do underwriters verify self-employment income? ›
The requirements get more challenging if you are self-employed. 2 years of income from your business is usually required, and in place of W2s, you need to prepare profit and loss sheets, balance sheets, and personal and business tax returns.
