Navigating Mortgage Approval with Gaps in Job History

Understanding Mortgage Approval with Job Gaps

As they say, “Life comes at you fast.”

There is a lot of truth behind those words. Much of the time it’s out of your control. You just have to roll with the punches. But, if you are someone who is interested in buying a house some of those punches you rolled with, might have meant time away from work. This can affect your chances of getting approved for a home mortgage.

You’ve probably already heard from friends, family or co-workers that you can’t get a loan unless you have been able to demonstrate two uninterrupted years of employment. It’s almost always mentioned as if it’s a common knowledge fact. But, is it? To a degree, yes, it is. However, like many things in life, there are exceptions to every rule.

So, if you are a borrower in search of a mortgage but have a gap (or two) in your job history in the past two years the question you are probably asking yourself is whether or not you would be able to qualify for a mortgage?

The short answer is yes, you may be able to still qualify even with gaps in your employment (but not guaranteed). Lenders prefer to see that their borrowers have a steady income for at least a minimum of two years. They want to make sure that you, the borrower, are a good investment – a calculated low risk. The more continuous the employment history looks the better you look to them as a safe bet. After all, they are giving a large sum of money to someone they don’t know and they want to protect their investment. Can you blame them?

One of the first things lenders will ask when you apply for a mortgage is to see documentation of your work history and income. This may require you to show your paystubs, W2 documents, tax records, bank statements, etc. Every borrower is different so documentation may vary for each borrower depending on the situation.

The two major things lenders are looking for when making an approval decision when gaps are in consideration are 1) determining if the income is stable and sufficient, 2) resolving whether or not there is a high probability they will continue with their employment.

Job Gap Explanations

If a gap in employment is identified, a Letter of Explanation may be required. The lender will want to know what were the circumstances that caused the gap? Did you stop working to raise a family? Took time off in between transitioning from one job to another? Went back to school to learn a new skill, trade or to get a master’s degree? They will use your explanation to help determine if you would make a good borrower and are worth the risk.

Seasonal Gaps

Sometimes, job gaps are common in certain industries like lawn-care, construction and other seasonal positions. These sorts of job gaps typically won’t hurt your chances but will still require the borrower to provide proof of income, which the lender will average out for the year.

Probability of Continued Employment

Another item lenders will consider when determining to approve a borrower is the probability of continued employment. In short, they want to know what the likelihood is that the borrower will stay employed.

Borrowers who have a lot of job gaps raise some red flags and will have a more difficult time getting approved. The inability to stay at a job for a long period of time is a detriment. However, a lender can be convinced that the position of employment at their current job will be for an extended period of time by way of requesting a Written Verification of Employment from the current employer that states the income and the probability of the borrower remaining employed. The length of time at that current position may be considered too.

Also, don’t forget that every borrower’s situation is different, and every lender is different. Fannie Mae and Freddie Mac set the official guidelines for loan requirements whether it be government loans, like FHA, USDA or VA, or conventional loans. There is an entire laundry list of rules on income, employment, credit limits and many other items that is way too detailed to even began exploring in this blog. However, keep in mind that banks and lenders may have overlays, which are the guidelines they set on top of Fannie and Freddie’s guidelines that govern them when deciding on issuing a loan to a borrower. This could actually make it more difficult to get approved with them. That is why checking with multiple lenders and especially mortgage brokers are important when in search of a home mortgage. Not all mortgage lenders are created equal.

So, will you qualify for a home loan if you have gaps in your job history?

Truth be told is that you won’t know until you take the step to find out and start the pre-approval process. But, if you are still unsure, the best suggestion is to speak to a licensed loan officer and discuss your situation. They won’t be able to give you a pre-approval based on a conversation, but they can evaluate your situation and determine if you would be a good candidate to complete a loan application.

They won’t be able to give you a pre-approval based on a conversation, but they can evaluate your situation and determine if you would be a good candidate to complete a loan application.