Lenders backed by the Federal Housing Administration (FHA) prefer lending to borrowers who have proof of a secure job and stable income that will likely continue. This is to ensure that they will get paid back. With this, borrowers are required to provide two years’ worth of job history to the lender, evidenced by traditional employment verifications and copies of pay stubs or W-2 forms.
Everyone has different ways and circumstances in which they make a living. Some may have recently changed jobs, have just recently gotten back to the workforce after an extended break, or perhaps are starting their own business. It can be confusing what exceptions and rules apply to who. Let’s tackle it together.
How Much Employment History Do You Need For an FHA Loan?
Your income is a large contributing factor in determining how much lenders will loan to you based on qualifying factors. Getting approved for an FHA requires you to fulfill certain guidelines and requirements. One is your employment history. The FHA will require you to provide your job history for the past two years.
However, it is important to note that according to HUD 4155.1 Chapter Four Section D, you are not required to have a minimum length of time holding a position of employment. What the FHA cares about more is proof that you are financially capable of paying off your loan and will continue receiving income in the foreseeable future.
This is why switching to different jobs, preferably in the same field, in a span of two years is acceptable. The HUD states that in scenarios like these, income stability takes precedence over job stability.
However, if the borrower changes jobs more than three times in a year or shifts their line of work, they must prepare additional documents to verify their employment income. HUD 4000.1 indicates:
- “..transcripts of training and education demonstrating qualification for a new position, or;
- “…employment documentation evidencing continual increases in income and/or benefits.”
The 203(k) loan, a subtype of the FHA loan, will have the same employment and income requirements.
Effective Income
Before we continue, it is important to know the meaning of the term effective income. It is used by the FHA to describe the income the borrower uses to pay the loan.
This usually means the gross income that is found on tax returns. This includes salary, wages, overtime pay, tips, commissions, and more.
Seasonal Workers
The FHA also understands that some fields of work are seasonal, such as building trades and agriculture. Allowances will be made for these people when their work history for the past 24 months is examined. They will be qualified as long as the borrower worked in the same job for the past two years and will be hired again in the next season.
Another important thing to note is unemployment compensation. Some seasonal workers receive unemployment benefits during their off months. According to HUD 4000.1, the FHA can count unemployment benefits in their effective income. It just comes down to assurance that these payments will continue down the line since these benefits are temporary.
Self-employed
A person is considered self-employed by the FHA if they own 25% or more interest in a business. Income from this borrower is considered effective income if they have been self-employed for at least two years.
With self-employed individuals, it is even more important to start the process earlier. Prepare to show your business’s net income, business expenses, and tax documents. Prepare your explanation during gaps between contracts, dips in the business, and whatnot. 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 Get an FHA Loan Without 2 Years’ Employment?
Say your two-year work history has gaps wherein you were not working. Be prepared to explain this to your lender. If you were in the military or school, it must be indicated. For proof, you will need to submit discharge papers or college transcripts.
But whatever your reason for having a gap in employment, you can still qualify for an FHA. As long as you’re fully employed at least six months before the case number was released to your mortgage and you prove that you have at least two years of documented work before your gap in employment.
Now let’s say you just got a new job and you’ve only been working there for a year and a half. Can you get an FHA loan? The answer depends on the lender, but it can be a yes. But you will need to have compensating factors that will make up for this setback.
This looks like:
- A larger down payment
- A higher credit score
- A lower DTI (Debt-to-Income) ratio
- A lot of money in savings or assets
If you have any or all of the above compensating factors, the lender may be more flexible and see you as a responsible and non-risky borrower.
Can You Get an FHA Loan if You Are Unemployed?
You cannot get an FHA loan if you don’t have any income to show.
But you can get an FHA loan if you were previously unemployed. In some cases, people who were unemployed for an extended period go back to the workforce and may want to get an FHA loan. An example of an acceptable employment situation is someone who took several years off work to raise kids and then returned to the workforce.
In this case, you need proof that you are employed in your current job for at least six months, and you also need documentation for a two-year work history before non-employment.
If you are unemployed and currently have a conventional loan, you can refinance to an FHA loan, even without a job. This is because the FHA doesn’t re-verify your income or employment.
The Bottom Line
Lenders don’t want to do business with risky and volatile individuals. That’s why they look at your credit score, DTI (debt-to-income) ratio, and of course, your work history.
If there are gaps in your employment for a month or more, it needs to be explained. Military enlistment and schooling are exceptions to the two-year work rule. Seasonal workers and their seasonal income are also taken into consideration.
Those that are self-employed also need to document two years of work in their business. Since business is more volatile, being self-employed for under a year means that your income is not considered effective.
Those that have just come back from an extended leave from the workforce are also welcome, as long as they have at least 6 months’ worth of employment history in their new job and two years’ worth of employment history before their gap.
Frequently Asked Questions
Can you count the income for a borrower who currently works 2 jobs?
Yes, second jobs can be used to qualify the borrower as long as they have worked in that job uninterrupted for two years and are likely to continue earning income from it. If not, it may only be considered as a compensating factor.
- If the borrower has been self-employed for only 1-2 years, they will be considered if they have two years of previous successful documented work in which they were self-employed or work in a related occupation.
- If the borrower has been self-employed for under a year, their income is not considered effective.
How do you prove employment for an FHA loan?
The borrower will need to submit their last two year’s W-2 and/or 1099 forms. If the borrower is self-employed, they will need to submit two years’ worth of personal income tax returns, business tax returns, business license, year-to-date profit and loss statement (P&L), and their balance sheet.
What does FHA consider a gap in employment?
For the FHA, being unemployed for a month or more is considered a gap in employment. The borrower must have an explanation for this gap. A gap that is more than 6 months is considered an extended gap. If you have an extended gap, you can still qualify for an FHA loan if you have 6 months of job history in your new employment and a two-year job history before your extended absence.
