FHA Work History Guidelines And Rules On Job Gaps
FHA Work History Guidelines And Rules On Job Gaps
This BLOG On FHA Work History Guidelines And Job Gaps Was UPDATED On May 9th, 2018
The Federal Housing Administration was established in 1934 to promote home ownership 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 initially originated
- Those lenders who did not abide by FHA guidelines will not be insured
- FHA guidelines has strict lending guidelines when it comes to FHA mortgage applicant and mortgage lenders need to follow the employment history guidelines in order for the mortgage to be insurable.
FHA Work History Guidelines Explained
FHA Work History Guidelines with regards to employment history states that home loan applicant needs an employment history of two years.
- The FHA Work History Guidelines confuses not just many borrowers but also loan officers
- The two year employment history does not mean borrowers needs to be employed or have steady employment history for the past 24 months with the same employer
- Per FHA Work History Guidelines, Borrowers 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 is borrowers has been employed for two years overall
- Here is a case scenario
- borrowers can have been employed for one year at ABC Company from 2015 until 2016
- then have taken two years off looking for work from 2016 until 2017
- regained full time employment in 2017 and is currently working
- This mortgage loan applicant will qualify for a FHA loan under FHA Work History Guidelines
- This is 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 per FHA Work History Guidelines
What If I Am Told I Do Not Qualify For FHA Loan Due To Job Gaps 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 lender says borrowers do not qualify because they were not at the same job with the same employer for the past two years, or had multiple jobs in the past two years, or had extended gaps in employment, those are not FHA Work History Guidelines
- If a lender tells the above things, their company have lender overlays that are above and beyond the minimum FHA Guidelines
- Borrowers will qualify for a FHA Loan with having multiple jobs and gaps in employment in the past two years
- Not from a lender with mortgage lender overlays but with a lender with no mortgage overlays
What Are Mortgage Lender Overlays?
There are two types of FHA Guidelines.
- The first and most important is the FHA Guidelines imposed by HUD
- The minimum guidelines imposed by HUD, the parent of the Federal Housing Administration ( FHA ), will guarantee loan approval as long as home buyer go with a lender that has no mortgage lender overlays and will just go off the minimum HUD Guidelines
- There are many lenders who do not have mortgage lender overlays
- Lenders with no overlays will just go off FHA minimum mortgage guidelines
- The second set of guidelines are called lender overlays
- Overlays are additional guidelines that are imposed by each individual mortgage lender
- Every lender can impose additional guidelines on top of the minimum FHA Guidelines
- A lender can set a lender overlay for a mortgage loan applicant where they will not accept any credit scores under 640
- FHA Guidelines to qualify for a FHA Loan is 500 with 10% down payment
- A 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
- 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 borrowers to pay off outstanding collections and charged off account
- Borrowers can still get a FHA Loan approved, funded, and closed with outstanding collection accounts with unpaid credit balances
- Borrowers with 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 lender with no overlays
- Gustan Cho Associates Mortgage Group has 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.
- Borrowers can have multiple jobs in the past two years and qualify for FHA Loans
- Gaps in employment is allowed
- If employed for less than 6 months and changed jobs, new income in new job will be used
- However, the lender will require borrowers have been at new job for at least 30 days
- 30 days of pay check stubs will be required prior to the lender issuing a clear to close and fund the mortgage
- If unemployed or out of work for 6 or more months, FHA Guidelines mandate to be on 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 borrowers have a two year employment history and have been on new full time job for at least six months
FHA Guidelines On Personal Profile
FHA require that borrowers need to be at least 18 years old to qualify for a FHA insured mortgage loan.
- If married couple, one of the borrowers need to be at least 18 years old
- Borrowers 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
- 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.
- Need documented income to qualify for any government mortgage
- 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 with credit scores of at least 620 or higher to get an approve/eligible per AUS
- For mortgage applicants with credit scores of under 620, the maximum front end debt to income ratio is capped at 43% to get an approve/eligible per automated underwriting system
- All manual underwrites are capped at 31% front end debt to income ratios and 43% back end debt to income ratios
- With compensating factors, debt to income ratios can get increase to 40% front end and 50% back end
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 cannot be used unless those income has two years seasoning
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 15% 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. Borrowers 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.