Obtaining a home mortgage insured by the Federal Housing Administration is a meticulous process. Lenders scrutinize every aspect of a borrower's credit profile to determine the likelihood of loan repayment. First-time buyers and seasoned homeowners alike can benefit from understanding the nuances of underwriting guidelines regarding employment and income stability, as these are some of the most important factors in qualifying. Familiarize yourself with FHA's policy on employment gaps before applying for a purchase or refinance loan.
FHA, an agency within the Department of Housing and Urban Development, insures loans made by approved lenders. FHA insurance protects lenders if the homeowner defaults, reimbursing their losses. The lender's underwriter evaluates the "four Cs" of borrower credit: credit history, capacity to repay, cash assets and collateral. To determine whether a borrower is capable of making monthly payments on-time, the underwriter analyzes their employment history and the income it generates, also known as effective income.
Lenders must verify employment for the most recent two full years. Borrowers must provide written explanation for employment gaps that span one or more months. When using an automated underwriting system for initial loan approval, FHA's Technology Open To All Lenders, or TOTAL, mortgage scorecard determines the requirement. A TOTAL recommendation rating of "Accept" or "Approve" requires explanation for gaps greater than 180 days within the past two years, while a "Refer" rating requires explanation for gaps greater than 30 days.
FHA will not deny a loan based solely on the presence of significant employment gaps. Automated underwriting which results in a referral to a Direct Endorsement, or DE, underwriter for manual review signifies the file represents higher risk to the lender. The DE underwriter must closely analyze the reason for the gap. If the borrower is found eligible, the lender must explain to HUD in writing why the borrower's employment gap history is not likely to jeopardize their ability to repay the loan in the future.
Ultimately, FHA considers income stability above job stability. A borrower with gaps in employment but returned to work in the same line of work within the past two years may still qualify if they advance in income or benefits. Such progress increases the probability of continued employment.
Acceptable reasons for extended employment gaps include taking time off to raise children or if the borrower was in school or the military. They must support the latter claims with college transcripts or discharge papers. After an extended absence, the borrower must have returned to work for at least the most recent six months and must document a two-year work history prior to the absence.
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