The Federal Housing Administration was established in 1934 to promote homeownership by making home financing affordable to working Americans with very little money down and lenient mortgage lending guidelines. The Federal Housing Administration, referred to FHA, is not a mortgage lender nor investor. It is a government entity that insures FHA loans made by private FHA approved mortgage lenders in the event of default where the property forecloses. FHA will insure the loss, or part of the loss, to the mortgage lender that has originated and funded the mortgage loan. In order for FHA to insure the defaulted loan against any losses, the private mortgage lender, such as banks, credit unions, mortgage companies, needed to have followed the FHA guidelines when the mortgage loan was initally originated. Those mortgage lenders who did not abide by FHA guidelines will not be insured. FHA guidelines has strict mortgage lending guidelines when it comes to FHA mortgage mortgage applicant and mortgage lenders need to follow the employment history guidelines in order for the mortgage loan to be insureable.
FHA Guidelines: Employment History
FHA Guidelines with regards to employment history states that a mortgage loan applicant needs an employment history of two years. The employment history FHA guidelines confuses not just many mortgage loan applicants but also mortgage loan officers. The two year employment history does not mean that the mortgage loan applicant needs to be employed or have steady employment history for the past 24 months with the same employer. A mortgage loan applicant can have multiple jobs in the past two years as well as gaps of employment. Extended gaps in employment is permitted, however, there are additional guidelines when it comes to extended gaps in employment. The two year employment history requirement is that FHA requires that the FHA mortgage loan applicant has been employed for two years overall. A mortgage loan applicant can have been employed for one year at ABC Company from 2010 until 2011, then have taken two years off looking for work from 2011 until 2013 , and regained full time employment in 2013 and is currently working. This mortgage loan applicant will qualify for a FHA loan under the 2 year employment history FHA Guidelines because he has an overall two year employment history. This mortgage applicant does not have two years of steady employment history with the same employer but has an overall two year employment history. This is what FHA requires.
What If I Am Told I Do Not Qualify For FHA Loan Because I Have Gaps In Employment In Past Two Years?
Many mortgage loan applicants are told that they do not qualify for a FHA loan because they did not have steady employment history of at least two years with the same company or because they had gaps in employment. When a mortgage lender tells you that you do not qualify because your were not at the same job with the same employer for the past two years, or that you had multiple jobs in the past two years, or had extended gaps in employment, those are not FHA Guidelines. If a mortgage lender tells you the above things, their company have mortgage lender overlays that are above and beyond the minimum FHA Guidelines. You will qualify for a FHA Loan with having multiple jobs and gaps in employment in the past two years. Not from a mortgage lender with mortgage lender overlays but with a mortgage lender with no mortgage lender overlays.
What Are Mortgage Lender Overlays?
There are two types of FHA Guidelines. The first and most important is the FHA Guidelines imposed by the Federal Housing Administration. The minimum guidelines imposed by HUD, the parent of the Federal Housing Adminstration ( FHA ), will guarantee you a mortgage loan approval as long as you go with a mortgage lender that has no mortgage lender overlays and will just go off the minimum FHA Guidelines. There are many mortgage lenders who do not have mortgage lender overlays and will just go off FHA minimum mortgage lending guidelines. The second set of guidelines are called mortgage lender overlays which are additional guidelines that are imposed by each individual mortgage lender. Every mortgage lender can impose additional guidelines on top of the minimum FHA Guidelines. A mortgage lender can set a minimum mortgage lender overlay for a mortgage loan applicant where they will not accept any credit scores under 640 FICO. FHA Guidelines to qualify for a FHA Loan is 500 FICO. A mortgage lender can require that a mortgage loan applicant needs to have two years steady employment history with the same company. FHA Guidelines do not require that. Mortgage lenders can require that all collection accounts with balances have their unpaid balances paid off as part of their mortgage lender overlays. FHA Guidelines does not require that and you can still get a FHA Loan approved, funded, and closed with outstanding collection accounts with unpaid credit balances. If you have prior bad credit, open collections, prior bankruptcy, prior foreclosure, gaps in employment, lower credit scores, charge offs, judgments, recent late payments, or other credit or debt to income ratio issues, consult with a mortgage broker where they have access to dozens of mortgage lenders who have no mortgage lender overlays and will just go off the minimum FHA Guidelines set by the U.S. Department of Housing and Urban Development ( HUD ).
Gaps In Employment
Gaps in employment is allowed under FHA Guidelines. You can have multiple jobs in the past two years and qualify for a FHA insured mortgage loans as well as gaps in employment. If you have been employed for less than 6 months and changed jobs, your new income in your new job will be used, however, the mortgage lender will require that you have been at your new job for at least 30 days. 30 days of pay check stubs will be required prior to the mortgage lender issuing a clear to close and fund the mortgage loan. If you have been unemployed or out of work for 6 or more months, FHA Guidelines mandate that you have been at your new job for at least 6 or more months. It is okay to have been unemployed or out of work for many years as long as you have a two year employment history and have been on your new full time job for at least six months.
FHA Guidelines On Personal Profile
FHA require that you need to be at least 18 years old to qualify for a FHA insured mortgage loan. If you are a married couple, one of the borrowers need to be at least 18 years old. You need to be a United States Citizen or permanent resident alien to qualify for a FHA insured mortgage loan. Non-permanent resident aliens need a valid social security number and need to be in the United States lawfully and have a legal U.S. residence and proof of residency.
Income Guidelines for FHA Loans
Days of no income verification and state income mortgage loans are long gone. You need documented income to qualify for any government mortgage loan and there are specific maximum debt to income ratio caps implemented by FHA. FHA allows up to a maximum 46.9% front end debt to income ratio and a 56.9% maximum back end debt to income ratio for FHA mortgage loan applicants who have credit scores of at least 620 FICO or higher. For mortgage applicants with credit scores of under 620 FICO, the maximum front end debt to income ratio is capped at 31% and the maximum back end debt to income ratio is capped at 43%. All manual underwrites are capped at 31% front end debt to income ratios and 43% back end debt to income ratios.
Part-time income, overtime income, and bonus income can be used as long as the mortgage loan applicant has at least a two year history earning part-time income, overtime income, and bonus income from the same company. If the mortgage loan applicant had multiple jobs in the past two years and had part-time income, overtime income, and bonus income in all of those multiple-jobs, that cannot be used unless those income came from the same employer.
Social security income, pension income, and disability income can be used as documented income. Social security income, pension income, and disability income can be grossed up by 25% if the mortgage loan applicant just gets a net check every month. Cash income does not count and cannot be used for income qualification purposes.
If a mortgage loan applicant is a self employed borrower or 1099 wage earner, FHA requires a minimum of two years tax returns and/or two years 1099 in order to qualify for a FHA loan. You can have multiple businesses and/or have been employed by multiple employers who issued you 1099 but two years of tax returns and/or 1099 is required.
Child support income, alimony income, and royalty income can be used towards income qualification, however, proof is needed that the income will continue for the next three years.