The Mortgage Brothers Show
Getting a Mortgage with Employment Gaps
This episode covers home loans with gaps in employment.
- All programs are fine with job gaps less than 30 days
- Fannie Mae technically does not have any job gap max allowed limit like Freddie Mac. Technically a borrower can be out of a job for years and come back to workforce along with letter of explanation and be okay. Only full time hourly or salary allowed.
- With Freddie Mac if the gap is greater than or equal to 6 months, a letter of explanation from the client is required explaining the circumstances surrounding the gap in employment. Freddie needs a 12 month work history in the last 24 months. Only full time hourly or salary allowed.
- FHA: job gaps over 6 months are an issue. They are doable if the borrower has been with current employer for 6 months and they have a consecutive 2 year work history prior to any job gaps.
- VA requires the borrower to have 12 months history on their current job if there are job gaps over 60 days with the last 2 years. Explanation letter needed, and only full time hourly or salary is allowed.
*The following transcript has been edited for clarity.
Eddie Knoell — I’m Eddie Knoell.
Tom Knoell — And I’m Tom Knoell.
Eddie — We’re the mortgage brothers team, everyone, and this is our podcast. And everyone, today Tom and I wanted to just let you know that we have a podcast special.
Basically just as our listeners have been watching our podcasts, or listening to them on their podcast players, we want you to know that there’s an offer we have just for you. If you mention that you’ve listened to our podcasts and call us to get a quote or contact us to get a quote, just tell us that you’ve heard our podcast and if you get a quote from us we’ll give you a $50 gift card to Amazon.
We’ll keep it simple. We’re not going to sit there and say, “Well all these conditions need to be met.” Now it has to be a real. I want you to be real. You call in. You tell us you want to get a quote and you mentioned this podcast you’ve listened to it, or … You know.
Tom — And we think you’re going to really, really like working with us. So we wanted to come up with something special for you guys. And can we throw out the code word, “zebra”?
Eddie — Zebra.
Tom — Zebra. That way, you and I, when we’re busy and someone calls and says, “Hey, we got a zebra on the line,” then we know what we’re working with. Okay. All right. So what are we talking about today?
Eddie — Okay.Today we’re talking about gaps of employment.
Tom — Gaps of employment. We’re not talking about working for Gap? Right.
Eddie — Right. Not talking about the Gap Store. Everybody in some time in their life has probably had a gap of employment. And there’s different ways to understand what gaps of employment are. Basically if you’re working for an employer, someone’s paying you, you’re obviously employed, and then you stop working for five months, five years, that’s what we call a gap. Let’s just keep it that simple for right now.
Tom — Right. And basically the reason why gaps are even defined or talked about is because underwriters are looking to see what the sustainability is and likelihood of your continued to make income. So they go back and they look at, “What has this person done before? How much work have they done? Any gaps?” So here we are talking about gaps. How does it affect people? And what’s our typical gap scenario?
Eddie — So a gap scenario is going to come up, typically someone who’s either lost their job and they’ve been looking for that right fit. And it depends. If you’re high up in kind of a corporate job, you’re a CFO, it can take you a year to find the right job. Right? If you’re kind of entry-level employment, you don’t have job gaps less than three weeks. Right? But the point is typical is a month or two of while you’re looking for that next employment, if you get let go. That that’s most typical.
But we can talk about mothers who’ve been at home for 10 years. How about someone who’s been taking care of their elderly parents? Right? There could be someone who’s been disabled in a car wreck, someone who’s been disabled for all sorts of reasons, then they come back to the workforce.
Tom — Yeah. So there’s many reasons why someone may not be making an income. And I think that’s the biggest thing is you’re still working. You’re still doing stuff. You’re helping. You’re volunteering. You’re on a mission in Uganda. You’re just not getting income. And we’re just having to explain what is the reason for that gap of income. And here we are.
So, yeah, I think the most typical person, at least from my perspective, is … You know? We work with a lot of working class people. We have a lot of mothers and fathers that have either stayed home to take care of the kids and are now entering the workforce. And they’ve been working for a couple of months and they call and say, “Hey, Ed and Tom, we’re ready to apply for a loan or a re-fi, But I was out for a while and I’m working now for a couple months. Can I qualify?” So we thought, let’s do this podcast. Let’s figure out how we can help our audience figure out how to work around gaps.
Eddie — So we have three main loan programs: Conventional, FHA, and VA. That’s 95% of the loans really in the residential world. So let’s take the person with that big gap of employment. They’ve been unemployed for 10 years and they just got back into the workforce a month ago. The answer is, that person can do a loan, but we would have to put it into a conventional loan. FHA is not going to allow it. VA is not going to allow it.
Tom — Right.And the only reason why you wouldn’t like conventional is if your credit score wasn’t very good. So as long as you have decent credit, that answer we just gave you is awesome. You’ve been out of work for 10 years, or not working for 10 years, not making any income, you’re with a stable big company for a month and a half or whatever it is, you can get financing. Unbelievable.
Eddie — Yeah. And there is one caveat to the FHA loan. Take the example of a mom who’s been at home for 10 years. We need two years of employment history on our application to show the underwriter. Even though you may not have the … Let’s just say you’ve only been back for one month. We can go back 10 years and go to your previous employment. But we still need two years, even if it takes us to go back years to get it. That’s one caveat to that.
Tom — Right. Okay. But when we we’re talking about conventional, the stay-at-home mother, the stay-at-home father, back in the workforce for a month and a half, they can get financing as long as they have the ability to write a good letter of explanation as to why the gap was there. Okay? So conventional financing …. Woo-hoo! Awesome answer. Give us a call. We can help you.
Now we moved to FHA. So the biggest difference between FHA and conventional is what? If there’s a job gap over six months … Okay.
Eddie — Right. If there’s a job gap over six months, then it’s doable but they need that two-year work history.
Tom — And it doesn’t matter when that two-year work history was. You can go back 10 years.
Eddie — Yes. And it needs to be two years of consecutive work history. So we would have to go back into the past to do it. Okay.
Tom — So with FHA, which is where a lot of our first-time homebuyers will fall, our lower credit score borrowers will fall. If you are in an FHA situation, any job gap over six months, we don’t hit the pause button but we definitely dig in a little bit to figure out, “Okay, how are we able to explain some of the situations?” And one of the big pieces, “caveats” as you said, Ed, was having that two-year history at some point.
Eddie — Yes. And you actually do need to be with your employer for six months, so the most recent six months you have to … You know? So one month on the job won’t work. You need to have six months.
Tom — Good call. Okay. Now what happens if you were a little more aggressive in getting employment and your job gap was only five months? If you’re FHA, a five month gap …
Eddie — Yeah. We would just wait a month.
Tom — Right. Well would you still need the six months of employment?
Eddie — Yes. The rule basically reads that they both are required. You need to have … Now if you have a consecutive … Let’s see here. It basically says you have to be with your current employer for six months and the borrower would need to have consecutive two-year work history prior to any job gaps.
Tom — Right. If the job gap was more than six months. If the job gap is more than six months.
Eddie — If the job gap is … But they need to be on their current employer for six months.
Tom — Right. Okay. If there is a job gap, though, for five months?
Eddie — Yeah. Okay. Good point. If there is only a five-month job gap, then there is no requirement. FHA doesn’t care at that point whether you’ve been on the current job for a month or not. I see what you’re saying. Yeah, yeah. Good point.
Tom — All right. And then anything else on FHA or are we going to turn to VA?
Eddie — Let’s just go to VA.
Tom — Okay. So VA seems to be the most strict out of out of all three.
Eddie — Yeah. It really is. It requires borrowers to have at least a 12-month history on the current job, if there are any job gaps over 60 days within the last two years.
Tom — So that’s something definitely to keep in mind. And I think if there’s ever a reason as to someone’s asking, “Why is the VA that way?” I think because the VA loan is so good. The VA loan has such a high level of insurance, so to speak, because there’s that zero down payment. They’re wanting to have a little more on the job security standpoint.
Eddie — Yeah. That’s right. Again, on their current job, they need to have 12 months history if there has been a job gap of 60 days within the last two years.
Tom — Okay. All right. So to wrap up, conventional financing, we can work with almost any situation provided they are full time and they’ve been working for … What? At least a month.
Eddie — Yes. Let’s just say a month and a month.
Tom — Let’s say a month.
Eddie — And it’s always going to be case by case, right? Conventional is going to be flexible because they’re going to be able to look at someone’s situation case by case.
Tom — Okay.And then FHA, the big point there is that whether or not your job gap is more or less than six months.Right?
Eddie — Right.
Tom — If it’s more than six months, were not going to press pause but we’re going to dig in a little bit and we’re going to definitely find that minimum of a two-year history at some point in your career. And you must be in your job for at least six months.
Eddie — Yes. Your current job for six months.
Tom — Six months. Okay. And then on VA?
Eddie — Yeah, VA.
Tom — Any job you have over two months, that’s something that the VA’s going to very seriously look at, and they’re going to want to have a 12-month in work history within the last two years.
Eddie — And I know that we’re throwing out a lot of months, and explanations, and things like that. Everyone, please ask your loan officer, ask Tom or I, if you have any questions on this. Again, if you’re not sure which … You know? It’s easy to listen to these podcasts and maybe misunderstand what we’re saying, so just please reach out. We’ll make sure to clear it up for you.
Tom — And if you’re frustrated, please don’t be frustrated at us because Ed and I are …. You know? We talk before we do all of our podcasts. And these are very live, very organic, very free flowing, and it’s incredible how many situations and scenarios there are.
Eddie — Yeah.
Tom — Like, did you think there are literally this many different job gap discussions? And we actually recorded one, and we had to press pause and do it again because we started going off in some tangent just because there were so many different avenues. So that’s one of the primary reasons why you should just call. We can talk through these situations, because we guarantee you there’s no way we answered all your questions today in this little podcast about job gaps.
Eddie — That’s right. All right, well I think that sums it up. And everyone, you have a good week. Time to go home.
Tom — And remember, call us, folks, for that quote. We’d love to help you.
Eddie — That’s right.
Tom — The Amazon gift card.
Eddie — Mention that you heard us on the podcast and get that Amazon gift card. The code is “zebra”.
Tom — Zebra, folks. All right.
Eddie — All right. Take care.
Tom — Thanks, guys.
Eddie — Hey guys. Thanks for listening to the Mortgage Brothers show. Please let us know if you have any questions you’d like us to answer on this podcast. You can email your questions. There’s email@example.com or yours truly at firstname.lastname@example.org. And be sure to ask us for a free quote on your next mortgage. Tom and I will personally work with you and help you through the whole process.
Signature Home Loans, LLC does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Signature Home Loans, NMLS 1007154, NMLS 210917, and 1618695. Equal housing lender.