Quick Summary
- Lenders will want a two-year employment history supported by W-2 and/or 1099 papers.
- Any employment gaps must be explained; school and military service are exceptions to the two-year norm.
- Extended gaps are permitted if the borrower has at least six months of working history and two years of employment experience prior to the absence.
Lenders backed by the Federal Housing Administration (FHA) favor borrowers with evidence of a secure job and a stable, likely continuing income. This ensures that they will be reimbursed. Borrowers are expected to furnish the lender with two years of employment history, as indicated by traditional employment verifications and pay stubs or W-2 forms.
Everyone’s methods and circumstances for earning a living are unique. Some may have recently changed employment, returned to the workforce after an extended absence, or are even launching their own business. It can be unclear to whom exceptions and rules apply. Let’s approach this collectively.
How Many Years of Employment History Are Required for an FHA Loan?
Your money plays a significant role in determining how much lenders will loan to you. To qualify for an FHA loan, you must fulfill certain guidelines and requirements. One is your work experience. The FHA will want you to give a two-year employment history.
Nevertheless, it is essential to highlight that according to HUD 4155.1 In accordance with Section D of Chapter Four, you are not needed to have a minimum length of employment. FHA is more concerned with evidence that you are financially able to repay your loan and will continue to get income in the near future.
This is why changing jobs within two years, ideally within the same industry, is acceptable. In situations such as these, according to HUD, income stability takes precedence over employment security.
However, if the borrower changes jobs more than three times a year or changes their line of work, they must provide additional proof of employment income. HUD 4000.1 indicates the documents listed below:
- “transcripts of training and education indicating qualification for a new position;
- or employment papers demonstrating continuous income and/or benefit increases.”
The 203(k) loan, the same work and income conditions will apply to a subtype of the FHA loan.
Effective Revenue
Before proceeding, it is essential to understand the concept of effective income. The FHA uses it to characterize the borrower’s income utilized to repay the loan.
This typically refers to the gross income reported on tax returns. This covers base salary, overtime compensation, tips, and commissions.
Seasonal Employees
The FHA recognizes that some occupations, such as construction and agriculture, are seasonal. When their employment history over the past two years is checked, these individuals will be given allowances. They will be eligible if the borrower has held the same position for the past two years and will be rehired for the upcoming season.
Unemployment compensation is an additional factor to consider. During the off-season, some seasonal workers obtain unemployment benefits. According to HUD 4000.1, the FHA may include unemployment benefits in the calculation of the borrower’s effective income. Since these advantages are temporary, all that is required is confirmation that future payments will continue.
Self-employed
The FHA considers a person to be self-employed if they own at least a 25 percent stake in a business. If this borrower has been self-employed for at least two years, his or her income is deemed effective income.
It is much more vital for self-employed individuals to initiate the procedure earlier. Prepare to demonstrate your company’s net income, costs, and tax paperwork. Prepare your explanation during lulls between contracts, business slumps, etc. It’s better to find a lender in your area sooner since your process will be more difficult compared to traditional-income earners.
Can I qualify for an FHA loan without two years of employment?
Suppose there are gaps in your two-year employment history in which you were not employed. Prepare yourself to explain this to the lender. If you served in the military or attended school, you must indicate that. You must produce discharge papers or college transcripts as evidence.
But regardless of the cause for your employment hiatus, you can still qualify for an FHA loan. As long as you have been continuously working for at least six months prior to the publication of your mortgage case number and you can provide evidence of at least two years of documented work before your employment hiatus.
Suppose you just started a new job and have only been there for a year and a half. Can an FHA loan be obtained? It depends on the lender, but the answer could be yes. However, you will need offsetting elements to compensate for this setback.
This looks like:
- A greater initial down payment
- A better credit score
- A reduced debt-to-income ratio (DTI)
- A substantial amount of funds or assets
If you possess any or all of the aforementioned mitigating circumstances, the lender may be more accommodating and view you as a responsible and low-risk borrower.
Can You Get an FHA Loan if You Are Unemployed?
You cannot qualify for an FHA loan if you cannot provide proof of income.
However, if you were previously unemployed, you may qualify for an FHA loan. In some instances, long-term unemployed individuals return to the employment and may wish to obtain an FHA loan. A person who spent several years off to raise children and then returned to the workforce is an example of a satisfactory employment scenario.
In this instance, you must provide evidence that you have been working at your present position for at least six months, as well as verification of a two-year work history prior to your period of unemployment.
Even if you are currently unemployed and have a conventional loan, you can refinance to an FHA loan, because the FHA does not re-verify your income or employment.
Lenders avoid doing business with high-risk, volatile persons. This is why they consider your credit score, DTI (debt-to-income) ratio, and employment history.
If there are work gaps of at least one month, these must be explained. Enlistment in the military and education are exceptions to the two-year work restriction. Additionally, seasonal workers and their seasonal revenue are included.
Those who are self-employed must also provide evidence of two years of job experience. Since business is more variable, having less than a year of self-employment renders your revenue ineffective.
Those who have recently returned to the workforce after an extended absence are also welcome, provided they have at least six months of employment experience in their new position and at least two years of employment history before their absence.
FAQs
How can I demonstrate employment for an FHA loan?
The borrower must produce their W-2 and/or 1099 records from the previous two years. If the borrower is self-employed, two years’ worth of personal income tax returns, business tax returns, a business license, a profit-and-loss statement (P&L) and a balance sheet are required.
What Does the FHA Consider an Employment Gap?
A month or longer of unemployment is considered a gap in employment by the FHA. This gap requires an explanation from the borrower. A gap longer than six months is regarded to be extended. You can still qualify for an FHA loan if you have six months of employment history at your new job and two years of employment history before your extended vacation.
Can the Income of a Borrower Who Currently Holds Two Jobs Be Considered?
Yes, second occupations can be utilized to determine a borrower’s eligibility if they have been held for at least two years and are anticipated to continue earning revenue. If not, it may be considered a compensatory factor solely.